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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended March 31, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission file number: 0-28560
RESEARCH ENGINEERS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2356861
(State or other jurisdiction (IRS. Employer
of incorporation) Identification No.)
22700 Savi Ranch Parkway, Yorba Linda, CA 92887
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 974-2500
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $11,023,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 24, 1997 was $4,289,688.
The number of shares outstanding of the registrant's only class of Common Stock,
$.01 par value, was 5,701,000 on June 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: Certain information is incorporated into
Part III of this report by reference to the Proxy Statement for the Registrant's
1997 annual meeting of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Introduction
The Company is a leading provider of technically advanced engineering software
solutions. The software provides fully integrated easy-to-use design automation
and analysis solutions for use by engineering analysis and design professionals
worldwide. The Company's comprehensive line of structural, mechanical, civil and
process/piping engineering software products are designed to fully integrate the
functions of model generation, analysis, design drafting and data presentation.
All of the Company's products utilize a proprietary Windows-based graphics
engine, allowing the software to be used with or without third party CAD
software. The Company's products assist engineers in performing a myriad of
mission-critical engineering tasks, including the analysis and design of
industrial, commercial, transportation and utility structures, pipelines,
machinery and automotive and aerospace products and survey, contour and digital
terrain modeling. Suggested list prices for most of the Company's products range
from approximately $995 to $5,000.
The Company currently licenses its software products to more than 16,000
customers accounting for over 35,000 software installations and 110,000
concurrent users worldwide. A selected list of The Company's customers include:
Bechtel Corporation, Boston Edison, British Telecom, California Department of
Resources, California Institute of Technology, Jet Propulsion Laboratories,
Exxon Corporation, Fluor Daniel, Inc., General Dynamics, NASA, Rocketdyne,
Siemens AG and Toyo Engineering. The Company's products are sold and supported
domestically and internationally through its network of branch offices,
subsidiaries and representatives in the United States, the United Kingdom,
Germany, Japan, France, Scandinavia, Australia, China, Singapore, India,
Indonesia, Korea, Thailand, Malaysia, South Africa, Mexico, Russia, the Middle
East and Latin America. The Company's structural and civil engineering products
provide eight international language options and local design codes required by
its worldwide markets.
Industry Background
The engineering design industry is comprised of a broad range of organizations
including small, medium and large-sized engineering consulting firms,
manufacturing companies, construction/fabrication companies, utilities,
transportation companies and government agencies and is characterized by rapidly
changing market demands as a result of evolving quality/safety regulations,
increasing complexity of engineering projects, increasing demand for
interdisciplinary information integration and increasing competition.
Historically, engineering design organizations relied on internally developed
programs or "public-domain" software that was developed by universities for
analysis and design tasks. These programs typically ran on expensive mainframes,
minicomputers or workstations in highly centralized environments. As a result of
the increased availability of powerful desktop personal computers ("PCs") which
are capable of accommodating the needs of sophisticated engineering software,
engineering professionals have shifted from these expensive customized
hardware/software solutions to commercial, PC-based solutions. The Company
believes that the shift to powerful PCs has resulted in an increased demand for
technically sophisticated, easy-to-use engineering software products that
automate, simplify and integrate analysis and design functions in a cost
effective manner. The following industry dynamics contribute to this increasing
demand:
Increasing regulatory and compliance requirements. In recent years, the
engineering design industry has been subject to significant changes in
regulatory and compliance requirements resulting from, among other things,
natural disasters such as Hurricane Andrew and the Northridge and Loma Prieta,
California earthquakes. For example, in many of the structural engineering
segments of the industry, all newly constructed structures in a seismic or
critical wind load (hurricane/tornado) zone are required to comply with certain
mandatory design requirements irrespective of their size and complexity. In
addition, with the widespread adoption of increased quality assurance standards
such as ISO 9000, even simple consumer products, such as toys, are now subject
to strict quality and safety standards which require computerized stress test
analyses on such products. All of these new regulatory requirements have
significantly increased the demand for highly accurate, cost-effective
engineering analysis and design automation software.
Increased use of engineering analysis and design software by small and medium-
sized design/manufacturing firms. Although the engineering design industry was
among the first industries to use sophisticated computer hardware and software,
a significant number of small and medium-sized design/manufacturing companies
could
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not fully utilize such products due to the costs involved. For example, prior to
the availability of PC-based solutions, the cost for a typical hardware/software
system capable of full-scale solid modeling functionality would start at
approximately $70,000. With the advent of moderately priced powerful Pentium-
based PCs (with large RAM and storage capabilities), equipped with sophisticated
operating systems such as Windows 95 and NT, small and medium-sized
design/manufacturing companies can now afford the systems to run technologically
advanced engineering software. This decrease in the cost of computing power has
allowed small and medium-sized design/manufacturing firms to successfully meet
the new regulatory and compliance requirements described above in a cost
efficient manner thereby increasing competition in the engineering design
industry.
Growth in demand for engineering analysis products with built-in graphics
functionality. Traditionally, the engineering analysis and design market has
been dependent on third-party CAD products to add graphics, visualization and
presentation capabilities to engineering software. However, the high cost of
third-party CAD software, which can range from $6,000 to $24,000, coupled with
its lack of application specific details and potential compatibility problems
has created a demand for engineering products with incorporated proprietary
fully integrated graphics and/or CAD technology. All of the Company's products
incorporate the Company's proprietary Windows-based graphics technology to allow
for visualization, verification and drawing generation capabilities. See "--
Technology."
Growth in international engineering software market. The international
engineering software market is growing rapidly due in large part to the
worldwide surge in infrastructure related construction activities. The newly
industrialized and emerging growth areas of the world, including South East
Asia, China, India and the Latin American countries, have embarked on major
infrastructure development and construction efforts.
These dynamics have increased the volume and complexity of information
analysis and exchange between engineering design organizations and organizations
in related disciplines, such as construction, fabrication and production.
Consequently, engineering design firms require more powerful and better
integrated software products for their analysis and design activities. In order
to operate efficiently within this environment, engineering design organizations
must automate and integrate their mission-critical and labor-intensive
functions, including (i) model development, (ii) engineering analysis, (iii)
graphical visualization/verification, (iv) engineering design based on code
requirements and (v) report generation. Modern engineering concepts such as
"concurrent engineering" (i.e., performance of all process functions in a
concurrent manner) are becoming increasingly important in today's competitive
environment. See "--Technology."
Business Strategy
The Company's mission is to become one of the world's leading suppliers of
stand-alone and network-based engineering software products for engineering
analysis and design professionals. The Company seeks to achieve its objectives
through the following strategies:
Leveraging Existing Customer Relationships. The Company considers its
relationships with existing customers to be an important corporate asset.
Currently the Company has over 16,000 customers, accounting for over 35,000
software installations and 110,000 concurrent users worldwide. The Company
continually introduces new products and upgrades to enhance and extend its
product line. The Company believes that its direct and frequent contacts with
its customers provide important market intelligence, which in turn is used to
develop new, demand-driven products.
Maintaining Leadership in Research and Development Activities. The Company
believes that it is an industry leader in designing and developing products for
the technically sophisticated segment of the engineering analysis and design
industry and in providing products that address the entire spectrum of the
engineering design process in an integrated manner. The Company is committed to
continually advancing the capability of its products, through the incorporation
of advanced technologies. The Company has established research and development
facilities in the United States and India. Both of these facilities employ
highly skilled technical personnel. The Company's offshore research and
development facility is a key competitive advantage, in that it produces
substantially more development effort for equivalent dollars spent in the U.S.
See "--Product Development."
Expanding the Company's Marketing, Sales and Product Support Activities. The
Company believes that its direct sales approach and extensive use of
demonstration materials, is the most effective way to market and sell its
software products to engineering professionals. This market typically requires
a full understanding of product capabilities in making a purchase decision. See
"--Sales and Marketing." The Company has recently expanded its telesales
operation by establishing a separate telesales division and increasing the
number of telesales professionals. In addition, the Company intends to expand
its marketing and product support activities through
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expanding the Company's presence on the Internet to provide additional product
information to current and potential product users. The Company's Internet
strategy includes providing on-line product demonstrations and on-line use (for
a fee) of the Company's products for discrete projects.
Expanding International Presence. The Company intends to expand its
international presence by opening offices or acquiring businesses in those
foreign countries that provide the greatest potential for sales. In fiscal 1997,
approximately 55% of the Company's revenues were attributable to customers
located outside the United States. All of the Company's products support a
complete range of international measurement units. The Company's structural and
civil engineering products allow customers to choose from eight major
international languages and twelve market specific design codes. The Company
intends to continually evaluate whether to create additional foreign language
versions of any of its products and/or to include specific international design
codes within a particular product based upon, among other things, the Company's
experience in particular foreign markets and the specific design
approval/validation requirements of the particular foreign market.
Expanding Through Acquisitions. In addition to the Company's internal product
development activities, the Company has, and expects to continue to expand its
product lines, technology and product base through acquisitions complementary to
the Company's current operations. In 1990, the Company acquired The Technical
Group, a software company that developed CIVILSOFT, which is regarded by many to
be the leading engineering and surveying software in the industry today. In
1995, the Company acquired STARDYNE, the first commercially available finite
element analysis software, now regarded by many as an industry standard. In
March 1996, the Company completed its acquisition of ADLPipe, Inc., a software
company that has provided piping analysis and design solutions since 1975. In
December 1996, the Company completed its acquisition of QSE (Bristol) Limited, a
provider of structural analysis and design software that expands the Company's
product offerings to the residential and light commercial markets. In March
1997, the Company acquired the rights to STRUCT etc., from Intrasoft, Inc., a
structural engineering software product consisting of 88 small stand-alone
software modules that are currently in use by thousands of architects and
engineers. The Company believes that additional opportunities exist to expand
its product lines by acquiring businesses, products and technologies that
complement those of the Company.
Products
The Company's engineering analysis and design software product lines include
its core structural engineering line and its emerging civil, mechanical and
process/piping lines. All of the Company's current products use the Company's
proprietary Windows-based graphics engine that provides the most modern graphics
environment for model development, visualization/verification and drawing
generation. These products are also designed for use in conjunction with third
party CAD drafting systems, including AutoCAD and MicroStation. Suggested list
prices for most of the Company's products range from approximately $995 to
$5,000.
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The following table describes the Company's software products:
<TABLE>
<CAPTION>
Product
Category Product Name Function Applications
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Structural STAAD-III Integrated structural analysis Engineering/architectural
Engineering and design for consulting firms, construction
steel/concrete/timber codes; companies, power/energy
static/dynamic/non-linear/seismic industries, government and
analysis; incorporates U.S., municipal agencies, industrial
British, German, Japanese and plant design, offshore/marine
other international codes. engineering, equipment
manufacturers, transportation
engineering, facilities
engineering.
STAAD-III Same as above - Allows users to Same as above
Online submit jobs for analysis via
modem on a pay-per-use basis
QSE - Quick Integrated analysis and design For light industrial and
Structural for 2D/3D structures: residential applications.
Engineering steel/concrete design per US and Engineering/ architectural
British codes; links to consulting firms; construction
detailing software. companies.
STRUCT.etc -- A comprehensive array of 88 For light industrial and
STRUCTural structural engineering software residential applications.
Engineering tools ideal for efficient design Engineering/ architectural
Tool Case and analysis of steel, concrete consulting firms; construction
timber and masonry structures. companies.
- -------------------------------------------------------------------------------------------------------
Mechanical STARDYNE Finite element analysis of Aerospace, nuclear, machine
Engineering mechanical/structural tools, machinery,
components; machine design, manufacturing, automotive,
equipment design; static/ civil/structural, offshore/
dynamic/non-linear/buckling/ marine, electrical, chemical,
transient/random vibration/ processing, power/energy,
thermal/ fracture/fatigue mining.
analysis.
VISUAL SOLID 3D solid modeling in design All of above.
automation; integrated with
finite element analysis.
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Process/Piping ADLPIPE Analysis, design and code Power, process, industrial
Engineering checking of piping systems; plant design.
static/dynamic/
seismic/non-linear analysis;
transient thermal analysis;
supports U.S., British and other
international codes.
- -------------------------------------------------------------------------------------------------------
Civil CIVILSOFT Surveying, contouring, Civil engineering consulting
Engineering roads/highway design, site, firms; government/municipal
design, digital, terrain, agencies; utilities;
modeling, earthwork transportation; facilities;
calculations, water network construction companies.
design, sewer/storm drainage
systems, hydraulics/ hydrology.
- -------------------------------------------------------------------------------------------------------
</TABLE>
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Structural Engineering. The Company's structural engineering products may be
used to analyze and design almost any type of structure, including, among
others, buildings (residential and commercial), bridges, industrial structures,
utility structures, transportation structures and transmission towers. Because
of the broad analytic nature of this software, users of the Company's structural
engineering product line include a wide range of organizations from Fortune 500
companies to individual consulting engineers. The Company's structural
engineering product line primarily consists of STAAD-III, a stand-alone
integrated structural analysis and design software with drafting capabilities.
The STAAD-III user base currently consists of over 6,000 companies worldwide
with more than 20,000 installations. Of the top 500 architectural/engineering
companies ranked in the April 14, 1997 issue of Engineering News-Record (a
McGraw-Hill publication), all of the top ten, 24 of the top 25 and 44 of the top
50 are STAAD-III users. In Engineering News-Record's most recent annual survey
of the structural engineering segment of the architectural engineering and
construction market STAAD-III was ranked third in terms of usage and likelihood
of purchase. The first and second ranked software were CAD products offered by
AutoCAD and Intergraph, neither of which offer structural engineering analysis
and design. While most of the users of STAAD-III are in the structural
consulting engineering business, STAAD-III is also used by construction
companies, architects, mechanical constructors/fabricators, government agencies,
utilities, petroleum producers, facility development/maintenance groups and the
manufacturing industry.
The Company also offers STAAD-III Online. This product provides all the
functionality of STAAD-III but is sold to the customer on a pay-per-use basis.
A customer is provided a package free of charge, which includes the STAAD-III
input generator, post processor software and all the necessary utilities for
remote connection. The customer uses the STAAD-III input generator to create an
input file that is transferred to the STAAD-III Online server, via modem, for
processing. Upon completion of analysis, the results are transferred back to
the customer's PC. The customer is billed based on the size of the input file.
The Company has positioned this product for the smaller engineering firm which
may only need to utilize STAAD-III on a limited basis.
In fiscal 1997 the Company entered into a workflow integration agreement with
Intergraph, Inc., the industries leading supplier of drawing and drafting
software, whereby, the two companies will develop program enhancements that will
allow STAAD-III to operate from within Intergraph products. These enhancements
will reinforce the two-way link between the software packages, giving structural
engineers seamless access to structural member data and a smoother workflow for
modeling structural members.
The Company recently expanded its structural engineering product line with the
addition of two new products: Quick Structural Engineering (QSE) and STRUCural
Engineering Tool Case (STRUCT etc.). QSE consists of a suite of integrated
analysis and design modules for frame structures. Additionally, QSE provides
the engineer with a detailing mode whereby a structural model can be quickly
transferred into a complete two-dimensional or three-dimensional detailed
drawing. STRUCT etc. provides customers a comprehensive array of 88 structural
engineering software tools ideal for the efficient design and analysis of steel,
concrete timber and masonry structures. Both QSE and STRUCT etc. are aimed at
the residential and light commercial market segments.
Mechanical Engineering. The Company's mechanical engineering product line was
added in 1995 with the acquisition of STARDYNE, a general purpose finite element
analysis software. STARDYNE was the world's first commercial finite element
analysis software and has been serving the mechanical engineering segment of the
industry since 1968. STARDYNE has been enhanced and integrated with other
products of the Company and is currently used by more than 2,000 companies
worldwide. For example, STARDYNE has been used by: Rockwell, to analyze the
Apollo spacecraft command module; by Rocketdyne, to analyze rocket engines for
the space shuttles; and by toy manufacturers, to design and test new products.
To enhance its mechanical engineering product line, the Company has developed
and introduced VISUAL SOLID, a full-scale three-dimensional solid modeling
software. VISUAL SOLID assists engineering professionals in developing an entire
three-dimensional model on a PC. Based on the Windows, Windows 95 and Windows
NT environments, VISUAL SOLID includes a graphics-based, intuitive, easy-to-use
interface and full-scale editing facilities. VISUAL SOLID's comprehensive model
development facilities include, among other facilities, Boolean operations,
shape change operators, parametric editing and part assemblies. In addition,
VISUAL SOLID is equipped with its own rendering engine and engineering drawing
generation modules. Fully integrated with STARDYNE, VISUAL SOLID allows
engineering professionals to automate the entire process of product design
including model development, verification/visualization, engineering
calculations and design drawings.
The Company has also acquired distribution rights to a product called FEMKIT
that will enter the Company
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into the finite element modeling market. FEMKIT provides a Windows native finite
element engineering environment with interfaces available for several popular
third party software products.
Process/Piping Engineering. The Company's process/piping engineering product,
marketed under the name ADLPIPE, is used in the analysis and design of piping
systems to obtain stresses and displacements under pressure, thermal and other
static/dynamic loading conditions. The Company acquired this technology as a
result of a merger with ADLPipe, Inc. in March 1996, and recently adapted the
product to Windows, making it the industries first Windows native process/piping
product. Approximately 2,000 companies, currently use ADLPIPE, worldwide.
Since its introduction in 1975, ADLPIPE has been used worldwide by more than
20,000 users.
Civil Engineering. The Company's civil engineering software products marketed
under the name CIVILSOFT, address all aspects of civil engineering, including
survey, contour and digital terrain modeling, hydraulics, hydrology and
water/sewer network design and analysis. The Company has recently released the
first phase of its WINCIVIL product line, which runs independently of expensive
third part CAD products. The Company believes that its civil engineering
products comprise one of the industries most versatile and comprehensive suites
of civil engineering software. Over 6,500 companies currently use the Company's
civil engineering software products worldwide, with more than 9,000
installations.
Customers
Research Engineers currently has over 16,000 customers accounting for over
35,000 software installations and 110,000 concurrent users worldwide. In fiscal
1997, 55% of the Company's revenues were generated from customers outside the
United States.
Sales and Marketing
The Company markets and sells its engineering analysis and design software
products through a direct sales approach consisting of three distinct phases.
First, the Company uses extensive print advertising, trade show participation
and direct mail campaigns to generate sales leads. Second, in response to
product inquiries generated through the above activities, the Company provides
elaborate evaluation/demonstration software packages complete with full user
manuals and working programs. Finally, the Company's telesales professionals are
used to close the sales. The Company's telesales professionals work in
conjunction with the Company's engineers in order to provide complete coverage
of business and technical issues in the sales cycle. The Company believes that
this type of direct sales approach, using extensive demonstration materials
prior to closing a sale, is the best way to market its products to engineering
professionals, who typically require a full understanding of product capability
in making a purchase decision. The Company also utilizes this type of sales
approach in connection with its marketing and sales of product enhancements,
upgrades and new products to current customers. The Company has recently
expanded its telesales operation by establishing a separate telesales division
and increasing the number of telesales professionals. In addition, the Company
has expanded its presence on the Internet by providing additional product
information to current and potential product users. The Company's Internet
strategy includes on-line product demonstrations and on-line use (for a fee) of
Company products for discrete projects.
The Company conducts sales and training seminars worldwide to provide current
and potential customers with additional information about its products,. During
fiscal 1997, the Company focused these efforts in South East Asia and conducted
seminars in Singapore, Bangkok, Manila, Hong Kong, Kuala Lumpur, Jakarta,
Shanghai, Beijing, Shenzhen, Bombay, Delhi, Madras and Calcutta. In 1998, the
Company is scheduled to conduct sales and training seminars in the United
States, United Kingdom, Japan, France, Germany, Spain, Scandinavia, Singapore,
Malaysia, Thailand, Indonesia, India, China and Mexico. Since 1987, the Company
has also organized Annual User Conferences for its customers. These events,
which are attended by worldwide users, are intended to serve as a forum for the
exchange of ideas and information. The Company has also been successful in
placing its products in various colleges and universities, including Harvard
University, Massachusetts Institute of Technology and California Institute of
Technology, as a means of introducing its products to future generations of
professionals.
The Company sells and supports its products internationally through its
extensive international infrastructure, consisting of branch offices,
subsidiaries and representatives located worldwide. Currently, the Company has
a total of 54 sales representatives and technical support personnel located in
the United Kingdom, Germany, Japan, France, Scandinavia, Australia, China,
India, Singapore, Indonesia, Korea, Thailand, Malaysia, South Africa,
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Mexico, Russia, the Middle East and Latin America. Most of the Company's foreign
sales representatives and technical support personnel are local nationals. The
Company's structural and civil engineering products allow customers to choose
from among eight major international languages and twelve local design codes.
Support and Training
The Company believes that providing its customers with direct support services
helps ensure that customers obtain the maximum benefits offered by its products.
The Company believes that its support programs also enhance the Company's
relationships with customers. Purchasers of the Company's software are typically
provided 120 days of product support without charge and a multimedia training
CD-ROM. For support after the 120-day period, customers can elect to purchase
ongoing support either on a one-year contract basis or on an as-used fee basis.
To provide quality technical support worldwide, the Company employs highly
qualified engineers and software specialists and maintains product support
centers in the United States (Orange County, California and Boston,
Massachusetts), United Kingdom, France, Germany, Scandinavia, Singapore, Japan,
China, India, Australia, Indonesia, Korea, Thailand, Malaysia, South Africa,
Mexico, Russia, the Middle East and Latin America. Many of the Company's support
professionals have advanced degrees. In addition, the Company maintains a World
Wide Web site on the Internet and provides e-mail technical support to its
users. Customers also receive a technical newsletter which is distributed
quarterly by the Company and which is designed primarily to apprise customers of
technological enhancements and new products offered by the Company.
Product Development
The Company offers a broad range of products that are designed to keep pace
with technological and regulatory developments in the marketplace and address
the increasingly sophisticated needs of its customers. The Company continually
focuses on expanding its existing product line offerings with acquired, upgraded
and new products. The Company specifically seeks opportunities to expand its
product offerings through acquisitions. All of the Company's acquired products
are incorporated into the Company's product lines with the goal of providing
seamless data transfer and functional integration. Product development
activities include, among others, adding new engineering analysis capabilities,
implementing new design codes, enhancing existing engineering data bases,
developing new ease-of-use features, enhancing user interfaces, implementing
emerging technologies, exploiting new hardware capabilities and platform
developments and providing improved interfaces with related third-party
products.
The Company's product development group includes experts in structural
engineering, mechanical engineering, civil engineering, piping/process
engineering, advanced mathematical techniques, numerical methods, computer
graphics and operating system technology. The Company has established research
and development facilities in the United States and India. The Company's
overseas offices contribute significantly to the development and maintenance of
local engineering design codes that are offered in certain of the Company's
products. The Company's offshore research and development facility in India is
used to develop certain core technologies that require significant man-hours.
Due to the availability of skilled technical personnel at a fraction of the cost
for comparable personnel in the United States, this offshore research and
development facility affords the Company the opportunity to obtain substantially
more development effort for equivalent dollars spent in the United States. The
Company believes that the use of its offshore research and development facility
provides a significant competitive advantage. In addition, the Company works
closely with leading universities in computer-aided engineering, including the
Massachusetts Institute of Technology and the University of Pennsylvania. The
Company has sponsored research projects and procured technologies from a number
of prominent universities including Vanderbilt University and Worcester
Polytechnic.
The Company releases enhanced versions of its software products on an on-going
basis. The Company works closely with its existing and prospective customers to
determine their requirements and to design enhancements and new products to meet
their needs. The Company believes that a substantial number of its product
enhancements in recent years have been developed as a result of the ideas and
suggestions of its customers.
To ensure that the Company's products meet the requirements of its users and
to ensure that the Company's software development, validation and maintenance
processes meet applicable regulatory guidelines on software development, the
Company has established an extensive quality assurance and quality control
process. Application specialists, who generally have advanced experience with
the Company's products, handle the "alpha" or internal testing of a new product,
while the "beta" testing of a new product is conducted both internally
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and by selected customers and consultants. The Company has a separate
documentation group that is dedicated to creating and updating the documentation
for each product, with a particular emphasis on making such documentation more
comprehensive and user-friendly.
Technology
The Company's software products automate engineering calculations that are
performed by structural, mechanical, civil and process/piping engineers. The key
technology components of the Company's products are: (i) the mathematical models
of the system, (ii) the engineering databases, (iii) the numerical algorithms,
(iv) the software architecture, (v) the graphical user environment and (vi) the
use of preferred operating systems.
Mathematical Models. The mathematical model in an engineering analysis
includes the geometry of the system, physical properties of the components and
external influences such as loads. The model of an engineering system such as an
industrial building, machine component or pipeline may involve hundreds or
thousands of algebraic equations that may be linear or non-linear depending upon
the nature of the problem. The Company's products are comprehensive in their
analysis and modeling capabilities. For example, STARDYNE offers a wide range of
analysis options that include static, dynamic, second order, transient,
harmonic, thermal, buckling, time history, response/shock spectra, fatigue and
fracture analysis. Similarly, STAAD-III's comprehensive loading facilities
include static, dynamic, seismic, second order, moving loads, wind loads,
thermal loads and loads due to movement of supports. The models are based on the
fundamental laws of physics and mechanics, including static and dynamic
equilibrium. In addition, the user is allowed extensive control on the analysis
and design process through user specifiable parameters.
Engineering Databases. The Company's products are equipped with databases
containing engineering properties of all relevant commonly used materials and
structural sections. For example, STARDYNE's material library contains data for
28 different linear and non-linear materials that can be used in a wide range of
industries including aerospace, automotive, power, machinery, energy, mining,
marine and manufacturing. STAAD-III's steel section databank contains properties
of structural sections from ten different countries throughout the world. The
user can specify the required data from the engineering databases which saves
significant modeling time and ensures accuracy. In applicable situations, the
user is allowed to create and save data for customized use.
Numerical Algorithms. Engineering analysis models require sophisticated
underlying technology to solve large systems of linear/nonlinear algebraic and
differential equations. Solving these equations accurately and in a time and
cost efficient manner is key to the success of any analysis project. The Company
believes that its technology for solving these equations provides it with a
competitive advantage. A major focus of the Company's research and development
activities is the maximization of the computer's memory and storage resources
for numerical solution of equations. All of the Company's products have
benefited from proprietary research and development conducted in the fields of
numerical solutions, data compression/storage and disk caching technologies. The
solution technology in STARDYNE has been developed and perfected over a period
of almost thirty years since the product was first introduced in 1967.
Similarly, the solution techniques used in STAAD-III, ADLPIPE and CIVILSOFT have
been tested and proven in real life engineering projects for more than ten years
in each case.
Software Architecture. The Company's engineering software products are based
on the principle of "concurrent engineering." Under this methodology, the
engineer can perform all the functions of the process, such as, model
development, analysis, design, visualization, verification and drawing
generation in a "concurrent" manner. An underlying relational database unifies
the process and manages the flow of information within the electronic loop. The
Company believes that this unique blend of modern database technology with
sophisticated engineering algorithms provides for substantial competitive
advantage.
Graphical User Environment. STAAD-III, QSE, STRUCT etc., STARDYNE, CIVILSOFT,
ADLPIPE, FABRICAD and VISUAL SOLID are equipped with powerful and user-friendly
graphical user environments based on the principles of "concurrent engineering."
With implementation of modern graphics, CAD and database technologies, the
graphical user environment provides visual model generation, verification,
animation and extensive plotting/printing facilities. The Company believes that
the visual approach implemented in its software allows the engineer to be
significantly more productive and efficient.
Operating Systems and Hardware Platforms. The Company supports its products on
a wide range of hardware platforms and operating systems. STAAD-III, STARDYNE
and ADLPIPE are supported on PCs and UNIX-based workstations including Sun
Microsystems, Hewlett Packard, Digital Equipment Corporation, Silicon Graphics,
IBM, RISC and Intergraph, while QSE, STRUCT etc. and VISUAL SOLID are supported
on PCs only.
9
<PAGE>
All of the Company's products are available in single user, network-based and
client-server modes. The Company believes that engineers performing computer-
aided engineering analysis prefer operating systems similar to Microsoft
Windows. The Company has released new versions of its products for use on
Windows 95 and Windows NT, which are 32 bit operating systems designed for
network servers, high-end personal computers and workstations. The Company
believes that the enhanced speed, memory management capabilities and
multitasking operation of the Windows 95 and Windows NT operating systems make
them the best choice for the Company's technology-driven software products. The
Company's current research and development efforts are focused on developing
enhanced versions of its current products to take full advantage of the Windows
95 and Windows NT operating systems.
Competition
The engineering software industry is intensely competitive and rapidly
changing. A number of companies offer products that target the same markets as
the Company. Some of the Company's competitors and potential competitors have
larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than the Company.
The principal bases for competition in this industry include product
functionality, product reliability, price/performance characteristics, ease of
product use, availability of products on popular computer platforms, ability to
accurately model complex projects, end-user support and documentation, ability
to keep pace with technological advances and corporate reputation and financial
stability. The Company believes that its high caliber development effort,
demonstrated understanding of the needs of the engineering design industry,
demonstrated ability to attract and retain customers, demonstrated capability to
develop, acquire and implement emerging technologies, demonstrated capability to
provide technical support and demonstrated capability to provide attractive
price points for its products represents significant competitive advantages.
The Company's products compete, on occasion, with analysis tools that are
internally developed by a number of engineering firms. Increasingly, companies
in the engineering design industry have come to recognize that it is inefficient
and uneconomical for them to continue to develop and support engineering
analysis software internally. Many of them are currently replacing their
internally developed software with commercial engineering analysis software
tools, such as those provided by the Company. In the past the Company has
experienced threats of potential competition from a number of international
software development ventures that were financed by local foreign governments.
To date, none of these ventures has been successful in creating any commercially
competitive products.
The Company believes that it competes favorably in the engineering design and
analysis market based upon the combination of technical power and ease-of-use of
its software products, its integrated product line and its ability to provide
local customer support on a direct basis. In order to maintain its market
leadership and competitive position, the Company intends to (i) continue to
develop its solution technologies, (ii) continue to further integrate emerging
technologies (such as 3D solid modeling), (iii) continue to enhance the scope of
product applications, (iv) continue to focus on emerging hardware/software
platforms (such as Windows 95 and Windows NT) and (v) continue to improve upon
the ease-of-use of its software products.
There can be no assurance that competitors will not develop products that are
superior to the Company's products or that achieve greater market acceptance.
The Company's future success will depend significantly upon its ability to
increase its market share and license additional products and product
enhancements to existing customers. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's results of operations.
Intellectual Property and Proprietary Rights
The Company relies primarily on a combination of contract, copyright,
trademark and trade secret laws, license and confidentiality agreements and
software security measures to protect its proprietary technology. The Company
distributes its products under "shrink-wrap" software license agreements, which
grant end-users licenses to (rather than ownership of) the Company's products
and which contain various provisions intended to protect the Company's ownership
and confidentiality of the underlying technology. In addition, the Company's
software is distributed with a third party "hardware lock" to ensure copyright
protection. The Company also requires all of its employees and other parties
with access to its confidential information to execute agreements prohibiting
the unauthorized use or disclosure of the Company's technology. In addition, the
Company
10
<PAGE>
periodically reviews its proprietary technology for patentability, although the
Company does not have any current patents. Despite these precautions, the
Company believes that existing laws provide limited protection for the Company's
technology and that it may be possible for a third party to misappropriate the
Company's technology or to independently develop similar technology. In
addition, effective copyright and trade secret protection may not be available
in every jurisdiction where the Company distributes products, particularly in
foreign countries where the laws generally offer no protection or less
protection than those of the United States. Moreover, "shrink-wrap" licenses,
which are not signed by the end-user, may be unenforceable in certain
jurisdictions.
The Company believes that, due to the rapid pace of technological innovation
and change within the engineering industry, legal protections afforded the
Company's technology are less significant in affecting the Company's business
and results of operations than factors such as the reputation of the Company,
the knowledge, ability and experience of Company personnel, the frequency of
product enhancements and the timeliness and quality of the Company's customer
service and support.
The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology.
However, there can be no assurance that other parties will not assert technology
infringement claims against the Company in the future. The litigation of such a
claim may involve significant expense and management time. In addition, if any
such claim were successful, the Company could be required to pay monetary
damages and may also be required to either refrain from distributing the
infringing product or obtain a license from the party asserting the claim (which
license may not be available on commercially reasonable terms). As the number of
software products in the industry increases and the functionality of these
products further overlap, the Company believes that software developers may
become increasingly subject to infringement claims.
STAAD-III, QSE, STRUCT etc., CIVILSOFT, ADLPIPE, and VISUAL SOLID are
trademarks of the Company. STARDYNE(R) is a registered trademark of the
Company.
Employees
As of March 31, 1997, the Company had 93 full-time employees, including 35 in
product development and related support services, 34 in sales and marketing and
24 in finance and administration. Approximately 39 of the Company's full-time
employees are located in the United States and 54 are located internationally.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located in Yorba Linda, California,
in a company-owned facility consisting of approximately 41,000 square feet of
office and warehouse space. Additionally, the Company is in the process of
constructing a 22,000 square foot research and development facility in Calcutta,
India.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1997, no matters were submitted for vote to
the Company's common stockholders.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on The Nasdaq National Market
(ticker symbol RENG) since July 26, 1996 when the Company completed its initial
public offering of 1,495,000 shares of Common Stock. Prior to the initial
public offering, the Company's Common Stock was not publicly traded.
As of June 16, 1997 there were approximately 712 holders of record of the
Company's Common Stock, including stock held by affiliates and excluding an
undetermined number of stockholders whose shares are held in "street" or
"nominee" names.
The Company has reinvested earnings in the business and has never paid any
dividends to holders of the Company's Common Stock. The declaration and payment
of dividends are at the sole discretion of the Board of Directors and will
depend upon the Company's profitability, financial condition, cash requirements,
future prospects and other factors deemed relevant by the Board of Directors.
The high and low closing sales prices of a share of the Company's Common
Stock, as reported by The Nasdaq National Market, for the third and fourth
quarters of fiscal 1997 and the second quarter of fiscal 1997 (covering the
period from July 26, 1996 through September 30, 1996), the only quarters in
fiscal 1997 in which the Company's shares of Common Stock were publicly traded,
are as follows:
<TABLE>
<CAPTION>
LOW HIGH
--------- -------
<S> <C> <C>
Quarter ended March 31, 1997 $ 2 3/4 $ 3 7/8
Quarter ended December 31, 1996 2 3/4 8 1/4
Quarter ended September 30, 1996 5 3/16 8 1/2
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
Research Engineers, Inc. is a leading provider of technically sophisticated
stand-alone and network-based engineering software products that provide fully-
integrated easy-to-use design automation and analysis solutions for use by
engineering analysis and design professional worldwide. The Company's
comprehensive line of Windows-based engineering software products includes
STAAD-III, the Company's structural analysis and design software, as well as
mechanical, civil and process/piping engineering products. The Company's
software products assist engineers in performing a myriad of mission-critical
engineering tasks, including the analysis and design of industrial, commercial,
transportation and utility structures, pipelines, machinery and automotive and
aerospace products and survey, contour and digital terrain modeling.
From inception to 1985, STAAD-III was offered primarily through time-sharing
services. The Company began marketing its products directly to users in 1985 in
connection with the Company's release of the first PC-version of STAAD-III.
During 1986, the Company began its international expansion with the
establishment of a United Kingdom affiliate. An additional affiliate was
established in India during the same year in conjunction with the establishment
of Company's offshore research and development facility. The Company acquired
both of these commonly controlled affiliates in fiscal 1996. In November 1995,
the Company acquired its German distributor, EGIS GmbH, and established its
German subsidiary, Research Engineers GmbH. The Company currently has branch
offices, subsidiaries, distributors and representatives in the United States,
the United Kingdom, Germany, Japan, France, Scandinavia, Australia, China
Singapore, India, Indonesia, Korea, Thailand, Malaysia, South Africa, Mexico,
Russia, and the Middle East and Latin America.
In June 1995, the Company acquired the rights to the STARDYNE software
product. This acquisition enabled the Company to expand into the mechanical
engineering software market. In September 1995, the Company acquired the assets
and business of Das Consulting, Inc., a Massachusetts-based sales, marketing and
support organization. This acquisition enabled the Company to expand its sales
and support services, by establishing a branch office of the Company on the East
Coast. In March 1996, the Company acquired all of the assets and assumed the
business of ADLPipe, Inc., a Massachusetts-based developer of process/piping
12
<PAGE>
engineering software. The acquisition of this business enabled the Company to
add a complimentary product line to its existing structural, mechanical and
civil engineering software product lines. In addition, in fiscal 1997 the
Company purchased all of the outstanding stock of QSE (Bristol) Limited, a
structural engineering software manufacturer and marketer, and acquired rights
to STRUCT etc. from Intrasoft, Inc. QSE's structural engineering product and
STRUCT etc. further extended the Company's core product line by addressing the
lower-end residential and light commercial/industrial construction market
segment.
On July 26, 1996, the Company consummated its initial public offering ("IPO")
of 1,300,000 shares of its common stock at $5.00 per share (1,495,000 shares
after exercise of the underwriters over-allotment option on September 3, 1996).
The net proceeds of the offering (including exercise of the underwriters over-
allotment option), after deducting underwriter's commissions and offering costs
were approximately $6,469,000. A portion of the proceeds was used to repay
debt, acquire QSE (Bristol) Limited, to fund research and development and
support the Company's continued expansion.
The Company derives its revenues principally from sales of its engineering
software products and, to a lesser extent, from sales of software maintenance
contracts relating to its products. Software product revenues are recognized
upon shipment. Product maintenance revenues are amortized over the length of
the maintenance contract, which is usually twelve months. Inflation has not had
a significant impact on the Company's operating results to date, nor does the
Company expect it to have a significant impact during fiscal 1998. As the
Company continues to expand its international operations, its exposure to gains
and losses on foreign currency transactions continues to increase. The Company
plans to consider limiting such exposure by the purchase of forward exchange
contracts and/or hedging all material foreign currency-denominated receivables
by specific hedge contracts.
Results of Operations
The following table sets forth, for the periods indicated, certain statement
of income data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Net revenues 100.0 % 100.0 %
Cost of revenues 7.3 % 7.2 %
----- -----
Gross profit 92.7 % 92.8 %
----- -----
Selling, general and administrative expenses 71.3 % 65.1 %
Research and development expenses 10.7 % 14.5 %
In-process research and development expenses 6.5 % 1.2 %
----- -----
Operating income 4.2 % 12.0 %
Interest expense (0.4)% 3.4 %
Other (0.6)% (1.7)%
----- -----
Income before income taxes 5.2 % 10.3 %
Provision for income taxes 3.2 % 0.6 %
----- -----
Net income 2.0 % 9.7 %
----- -----
</TABLE>
Net Revenues. Net revenues for the fiscal year ended March 31, 1997 increased
by $3,700,000 (51%) to $11,023,000, as compared to $7,323,000 for the fiscal
year ended March 31, 1996. The increase in net revenues was primarily
attributable to (i) the Company's continued growth in overseas markets,
particularly in the Asia-Pacific market, (ii) continued market acceptance of the
32-bit Windows 95 and Windows NT versions of the Company's software products and
(iii) the Company's acquisition of new product lines. The Company's total
13
<PAGE>
revenues consist of software product sales and software maintenance and support.
As a percentage of total revenue, software product revenues represented 86.8%
for the fiscal year ended March 31, 1997 up 4.3% from 82.5% for the fiscal year
ended March 31, 1996. The Company's product maintenance revenues increased by
$176,000 (14%) to $1,455,000, as compared to $1,279,000 for the fiscal year
ended March 31, 1996. This increase was due primarily to the Company's larger
worldwide installed product base.
International net revenues increased as a percentage of total net revenues
from 40% for the fiscal year ended March 31, 1996 to 55% for the fiscal year
ended March 31, 1997. The increase in international revenues was primarily the
result of increased revenues from dealers and representatives in the Asia-
Pacific market (see "--Outlook"), as the Company's products continued to gain
market acceptance, and, to a lesser extent, the result of the acquisition of QSE
(Bristol) Limited in December 1996. The Company's domestic revenues and sales to
foreign customers originated in the U.S. are denominated in U.S. Dollars.
However, revenues and expenses for the Company's foreign subsidiaries and sales
offices, are usually recorded in the applicable foreign currency and translated
with any applicable foreign exchange adjustments. There were no foreign exchange
gains or losses which were material to the Company's financial results during
the fiscal years ended March 31, 1997 and 1996.
Gross profit. Gross profit decreased as a percentage of net revenues by .1%
to 92.7% for the fiscal year ended March 31, 1997 as compared to 92.8% for the
fiscal year ended March 31, 1996. This slight decrease was attributable to the
increase in international sales volume which resulted in slightly higher costs
associated with translating, preparing and shipping software and users manuals
for sale in the oversees markets. Costs of goods sold are not normally
significant as a percentage of net revenues due to the nature of the Company's
products.
Selling, general and administrative expense. Selling, general and
administrative expense increased by $3,091,000 (65%) to $7,860,000 in the fiscal
year ended March 31, 1997 as compared to $4,769,000 for the fiscal year ended
March 31, 1996, and increased as a percentage of net revenues from 65.1% to
71.3%. Selling expenses increased as a result of the higher commissions
associated with higher net revenues in the oversees markets, an increased number
of telesales professionals, and expanded worldwide sales operations. In order
to increase revenues and quickly gain market acceptance in the Asia-Pacific
markets, the Company has had to offer substantial financial incentives in the
form of commissions to various foreign-based dealers. See "--Outlook." General
and administrative expenses increased due to the addition of administrative,
customer service and technical support personnel and increased professional
fees.
Research and development expense. Research and development expense increased
by $123,000 (12%) to $1,183,000 for the fiscal year ended March 31, 1997 as
compared to $1,060,000 for the fiscal year ended March 31, 1996, but decreased
as a percentage of net revenues to 10.7% from 14.5%. Research and development
expenses consist primarily of software developers' wages. The increase was
primarily attributable to an increase in the number of software developers.
In process research and development. In connection with the acquisition of
QSE (Bristol) Limited in December 1996, the Company received an appraisal of the
assets acquired which indicated that these assets included approximately
$715,000 of research and development in process. In the opinion of management
and the appraiser, the technological feasibility of the acquired technology had
not yet been established and the technology had no future alternative uses at
the time of the acquisition. Accordingly, this amount was charged to expense.
These costs are considered non-recurring expenses and the Company is not able to
determine if any such costs will be incurred in the future.
Other (income) expense. Net interest (income) expense increased by $289,000
to ($43,000) in the fiscal year ended March 31, 1997 as compared to $246,000 for
the fiscal year ended March 31, 1996. The increase in interest income was a
result of the repayment of portions of the Company's debt following the IPO, and
the resulting decrease in interest expense, combined with the effect of income
from the invested proceeds of the IPO.
Income taxes. Income tax expense increased by $304,000 to $348,000 in the
fiscal year ended March 31, 1997 as compared to $44,000 for the fiscal year
ended March 31, 1996. Through September 1995, the Company operated as an S
corporation for Federal tax purposes. Therefore, the tax expense was related to
state and foreign taxes only. In October 1995, the Company converted to a C
corporation. Therefore, tax expense for the fiscal year ended March 31, 1996
includes Federal tax expense on operations subsequent to conversion. The pro
forma net income data in the Company's financial statements for the fiscal year
ended March 31, 1996 has been presented to reflect the Company's provision for
income tax expense as if the Company had been a C corporation during the entire
fiscal year ending March 31, 1996.
14
<PAGE>
Liquidity and Capital Resources
The Company currently finances its operations (including capital expenditures)
primarily through cash flows from operations as well as its cash and short-term
investment balances.
The Company's principal sources of liquidity at March 31, 1997 consisted of
$2,579,000 of cash, $1,701,000 of short-term investments and approximately
$500,000 available under a line of credit with Union Bank of California. The
Company's short-term investments consist of $1,015,000 of United States
government agency securities, classified as held-to-maturity and $686,000 of
preferred stock marketable equity securities, classified as available-for-sale.
The increase in total cash and investments during the fiscal year ended March
31, 1997 was primarily attributable to the proceeds of the IPO combined with
proceeds from the issuance of debt and increases in deferred maintenance revenue
offset by the repayment of debt, the purchase of capital assets, the acquisition
of QSE (Bristol) Limited combined with increases in accounts receivable, prepaid
expenses and other assets and decreases in accounts payable and other
liabilities.
The Company has a $500,000 line of credit with Union Bank of California, The
line of credit bears interest at the prime rate, is collateralized by
substantially all of the assets of the Company and expires on August 31, 1997.
As of March 31, 1997 there were no amounts of principal or accrued interest
outstanding relating to this line of credit. The Company plans to negotiate a
renewal to the line of credit; however there can be no assurances that such
negotiations will be successful.
In March 1997, the Company borrowed $1,800,000 from Union Bank of California.
These borrowings are secured by the Company's corporate headquarters in Yorba
Linda, California. This note is payable in equal monthly installments of
principal plus interest at 2.25% over the LIBOR Base Rate (7.97% at March 31,
1997) with a balloon payment due at maturity in April 2007. The proceeds from
this note are anticipated to be used to acquire related businesses, products and
technologies, although there can be no assurance that the Company will be able
to make any such acquisitions.
The Company consummated its IPO on July 26, 1996. A portion of the net
proceeds to the Company of $6,469,000 (which includes the amount received by the
Company as a result of the exercise of the underwriters over-allotment option on
September 3, 1996) was used to repay approximately $2,379,000 of indebtedness to
stockholders and banks and acquire QSE (Bristol) Limited for approximately
$1,536,000. The remaining proceeds are anticipated to be used to fund research
and development activities, to augment the Company's sales, marketing and
customer support activities and to acquire related businesses, products and
technologies.
The Company believes that its current cash and cash equivalents and short-term
investment balances and cash generated from operations and borrowings available
under the Company's line of credit will provide adequate working capital to fund
the Company's operations at currently anticipated levels through at least March
31, 1998. To the extent that such amounts are insufficient to finance the
Company's working capital requirements, the Company will be required to raise
additional funds through public or private equity or debt financings. There can
be no assurance that such additional financings will be available, if needed,
or, if available, will be on terms satisfactory to the Company.
Outlook
Certain statements contained in this "Outlook" are "forward-looking
statements" that involve risks and uncertainties. The actual future results of
the Company could differ materially from those statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this report, uncertainties regarding market acceptance of new
products, and product enhancements, delays in the introduction of new products,
and risks associated with managing the Company's growth, as well as those
factors discussed in the Company's Registration Statement on Form SB-2 and
related Prospectus dated July 25, 1996, and the "Risk Factors" described
therein.
The Company's quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future. Future quarterly results could be
impacted by factors such as customer order delays, a slower growth rate in the
market, increased competition or adverse changes in general economic conditions
in any of the countries in which the Company does business. While no single
customer accounted for more than 10% of revenues, the loss of a major
distributor or a reduction in orders from a major distributor could have a
significant impact on the results of operations in any particular quarter.
15
<PAGE>
A significant portion of the Company's revenue is from international markets,
particularly the Asia-Pacific Market. The Company anticipates that sales to
customers outside the United States will continue to account for a significant
portion of its total revenues in the foreseeable future. As a result, the
Company's financial results could be impacted by weakened general economic
conditions, differing technological advances or preferences, volatile foreign
exchange rates and government trade restrictions in any country in which the
Company does business. The Company has been able to bill most of its
international customers in US currency, significantly limiting the foreign
exchange risk. However, there can be no assurance that the Company will be able
to continue this practice as sales to international customers grow.
The Company has increasingly relied on distributors and representatives to
market its products, particularly in the Asia-Pacific Market. The Company's
revenue in any particular quarter may be negatively impacted by a lower than
anticipated performance of any significant distributor or representative or the
distributor or representative's inability to sell through product previously
Purchased. The Company does not offer a right of return to distributors or
representatives. The Company does, however, provide extended payment terms and
commissions to these distributors and representatives. Commissions range from
20% to 70% of gross sales. These commissions are recorded at the time of sale
and reflected in selling expenses in the consolidated statements of income.
Sales in other regions (North America and Europe) are generally made without
commissions. The dollar amount of commissions has increased throughout fiscal
1997 as sales to distributors and representatives have increased. The Company is
in the process of assessing the costs and benefits of continuing to offer these
commissions and is evaluating means whereby the amounts can be reduced. Means by
which commissions may be reduced include, but are not limited to, opening
additional foreign sales offices, establishing new foreign subsidiaries and
renegotiating current commission amounts with foreign distributors and
representatives. The Company may, however, find it necessary in the future to
continue to provide commissions at current levels or possibly increase them in
order to expand international sales. Such increases would result in lower
operating income.
The Company's success is dependent on its ability to continue to develop,
enhance and market new products to meet its customers' sophisticated needs in a
timely manner and which are consistent with current technological developments.
The Company's success also depends in part on its ability to attract and retain
technical and other key employees who are in great demand, to protect the
intellectual property rights of its products and to continue key relationships
with third party developers. The CAD/CAE/CAM software industry is highly
competitive. The entire industry may experience pricing and margin pressure
which as a result could adversely affect the Company's operating results and
financial position. In addition, certain of the Company's expenses are based,
in part, on its future revenue expectations. The Company continues to increase
its operating expense levels to meet the growing customer demand for the
Company's products and services. If revenue is below expectations, operating
results could be adversely and materially affected. Net income may be
disproportionately affected by an unexpected reduction in revenue because
certain expenses are generally committed in advance.
To expand its markets, the Company's business strategy includes growth through
acquisitions. Identifying and pursuing acquisition opportunities and
integrating acquired products and businesses requires a significant amount of
management time and skill. There can be no assurance that the Company will be
able to identify suitable acquisition candidates, consummate any acquisition on
acceptable terms or successfully integrate any acquired business into the
Company's operations. There also can be no assurance that any future
acquisition will not have an adverse effect upon the Company's operating
results, particularly in the fiscal quarters immediately following consummation
of the acquisition while the acquired business is being integrated into the
Company's operations.
The trading price of the Company's stock, like other software and technology
stocks, is subject to significant volatility due to factors impacting the
overall market which are unrelated to the Company's performance. The historical
results of operations and financial position of the Company are not necessarily
indicative of future financial performance. If revenues or earnings fail to
meet securities analysts' expectations, there could be an immediate and
significant adverse impact on the trading price of the Company's Common Stock.
The Company has not experienced a material adverse impact of such risks or
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
1. Independent Auditors' Report 18
2. Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 1997 19
Consolidated Statements of Income for the years ended
March 31, 1997 and 1996 20
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997 and 1996 21
Consolidated Statements of Cash Flows for the years ended
March 31, 1997 and 1996 22
Notes to Consolidated Financial Statements 24
</TABLE>
17
<PAGE>
Independent Auditors' Report
The Board of Directors
Research Engineers, Inc.:
We have audited the accompanying consolidated balance sheet of Research
Engineers, Inc. and subsidiaries as of March 31, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended March 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Research Engineers,
Inc. and subsidiaries as of March 31, 1997, and the results of their operations
and their cash flows for the years ended March 31, 1997 and 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
May 29, 1997
18
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1997
(In thousands, except share and per share amounts)
<TABLE>
Assets
Current assets:
<S> <C>
Cash and cash equivalents $ 2,579
Short term investments 1,701
Accounts receivable (net of allowance for doubtful accounts of $40) 2,138
Deferred income taxes 317
Notes and related party loans receivable 63
Prepaid expenses and other current assets 468
---------
Total current assets 7,266
Property, plant and equipment, net 2,723
Goodwill (net of accumulated amortization of $185) 1,306
Other assets 384
---------
$ 11,679
=========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 307
Accrued expenses 584
Income taxes payable 269
Deferred maintenance revenue 787
Current portion of long-term bank debt 187
Other 51
---------
Total current liabilities 2,185
---------
Long-term bank debt 1,962
Deferred income taxes 56
Stockholders' equity:
Preferred stock, par value $ .01. Authorized 5,000,000 shares; issued and
outstanding none -
Common stock, par value $.01. Authorized 20,000,000 shares; issued and
outstanding 5,701,000 shares 57
Additional paid-in capital 6,785
Retained earnings 551
Unrealized gain on investments 6
Foreign currency translation adjustment 77
---------
Total stockholders' equity 7,476
Commitments
---------
$ 11,679
=========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended March 31, 1997 and 1996
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Net revenues:
Product sales $ 9,568 6,044
Maintenance and support 1,455 1,279
------------ -----------
Total net revenues 11,023 7,323
Cost of revenues 800 524
------------ -----------
Gross profit 10,223 6,799
------------ -----------
Operating expenses:
Selling, general and administrative 7,860 4,769
Research and development 1,183 1,060
In-process research and development 715 89
------------ -----------
Total operating expenses 9,758 5,918
------------ -----------
Operating income 465 881
------------ -----------
Other (income)/expense:
Interest, net (43) 246
Other (62) (125)
------------ -----------
Income before income taxes 570 760
Income tax expense 348 44
------------ -----------
Net income $ 222 716
============ ===========
Net income per common and common equivalent share $ .04 -
============ ===========
Weighted average number of common and common equivalent
shares outstanding 5,314,814 -
============ ===========
Pro forma net income data (unaudited)
Income before income taxes as reported $ - 760
Pro forma provision for income tax expense - 262
------------ -----------
Pro forma net income $ - 498
============ ===========
Pro forma net income per share $ - .12
============ ===========
Number of shares used in computing pro forma
per share information - 4,139,384
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1997 and 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common stock Retained Foreign
------------------ Additional earnings Unrealized currency
Number of Par paid-in (accumulated gain on translation
shares value capital deficit) investments adjustment Total
--------- ------ ---------- ------------ ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995 4,095,437 $ 41 55 (301) -- (7) (212)
Foreign currency translation -- -- -- -- -- (14) (14)
Stockholder distribution -- -- -- (86) -- -- (86)
Issuance of common stock, net
of offering costs 110,563 1 276 -- -- -- 277
Net income -- -- -- 716 -- -- 716
--------- ---- -------- -------- ------- ------- -----
Balance, March 31, 1996 4,206,000 42 331 329 -- (21) 681
Foreign currency translation -- -- -- -- -- 98 98
Common stock issuance 1,495,000 15 6,454 -- -- -- 6,469
Unrealized gain on
investments -- -- -- -- 6 -- 6
Net income -- -- -- 222 -- -- 222
--------- ---- -------- -------- ------- ------- -----
Balance, March 31, 1997 5,701,000 $ 57 6,785 551 6 77 7,476
========= ==== ======== ======== ======= ======= =====
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 222 716
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
In-process research and development 715 89
Bonus expense for stock issuance -- 60
Depreciation and amortization 826 210
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable (974) (501)
Deferred income tax asset 8 (269)
Notes and related party loans receivable (23) (20)
Prepaid expenses and other current assets (300) 8
Other assets (311) (60)
Accounts payable (166) 117
Deferred maintenance revenue 101 104
Income taxes payable 35 193
Accrued expenses 31 (24)
Other current liabilities (106) 184
Other long-term liabilities (126) (5)
--------- -------
Net cash (used in) provided by operating activities (68) 802
--------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (621) (193)
Purchase of short-term investments (3,386) --
Sale of short term investments 1,691 --
Proceeds from repayment of related party note receivable 48 --
Payments to acquire companies, net of cash acquired (1,536) (227)
--------- -------
Net cash used in investing activities (3,804) (420)
--------- -------
Cash flows from financing activities:
Proceeds from issuance of bank debt 1,979 71
Repayment of bank debt (1,960) (87)
Repayment of stockholder loans (565) (185)
Common Stock issuance 6,469 --
Stockholder distribution -- (86)
--------- -------
Net cash provided by (used in) financing activities 5,923 (287)
--------- -------
Increase in cash and cash equivalents 2,051 95
Cash and cash equivalents, beginning of year 528 433
--------- -------
Cash and cash equivalents, end of year $ 2,579 528
========= =======
</TABLE>
(Continued)
22
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
Supplemental cash flow information:
Amounts paid for:
Interest $ 169 246
Income taxes 432 119
======== ======
Non-cash transactions:
Unrealized gain on investments $ 6 --
Common stock issued in business acquisitions -- 216
======== ======
Payments to acquire companies, net of cash acquired:
Assets acquired 1,245 733
Liabilities assumed (424) (379)
Purchased research and development 715 89
Common stock issued -- (216)
--------- ------
$ 1,536 227
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
Research Engineers, Inc. (REI or the Company) was incorporated in Delaware
on April 16, 1996 and is currently headquartered in Yorba Linda, California.
The Company develops and markets structural, mechanical, civil and
process/piping engineering software products worldwide.
The Company was formed pursuant to a merger agreement, dated April 26, 1996
with Research Engineers, Inc., a New Jersey Corporation, and the former
parent company of the Delaware Corporation (Surviving Company). On the
effective date of the merger, each share of Research Engineers, Inc. common
stock issued and outstanding was converted into 4.42148552 shares, $.01 par
value common stock of the Surviving Company. In conjunction, the Surviving
Company authorized a total of 20,000,000 shares of common stock and
5,000,000 shares of preferred stock, both at $.01 par value. All share and
per share amounts in the accompanying consolidated financial statements
have been restated to give retroactive effect of the stock split.
Principles of Consolidation
The consolidated financial statements include the accounts of Research
Engineers, Inc. and its wholly owned subsidiaries. Certain entities
previously held under common control were acquired as wholly owned
subsidiaries effective September 1995. These acquisitions were accounted for
on an "as-if" pooling method and therefore consolidated for all periods
presented, since they were entities under common control. All significant
transactions among the consolidated entities have been eliminated upon
consolidation.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires management to disclose the estimated fair value of certain assets
and liabilities defined by SFAS No. 107 as financial instruments. Financial
instruments are generally defined by SFAS No. 107 as cash or a contractual
obligation that both conveys to one entity a right to receive cash or other
financial instruments from another entity, and imposes on the other entity
the obligation to deliver cash or other financial instruments to the first
entity. At March 31, 1997, management believes that the carrying amounts of
cash and cash equivalents, short term investments, receivable and payable
amounts and accrued expenses approximate fair value because of the short
maturity of these financial instruments. The Company believes that the
carrying value of its bank debt approximates its fair value as the interest
rate approximates a rate that the Company could obtain under similar terms
at the balance sheet date.
Revenue Recognition
Revenue from software sales is recognized upon shipment provided that no
significant post-contract support obligations remain outstanding and
collection of the resulting receivable is deemed probable. The Company's
sales do not provide a specific right of return, and actual returns have
been insignificant. At the time of sale, the Company typically provides 120-
day initial maintenance and support to the customer. Costs relating to this
initial 120-day support period, which include primarily telephone support,
are not considered material. After the initial support period, customers can
choose to purchase ongoing maintenance contracts that include telephone, e-
mail and other support, and the right to purchase upgrades at a discounted
price. Revenue from these maintenance contracts is deferred and amortized
using the straight-line method over the life of the contract.
24
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are translated using the local currency as the functional
currency. Assets and liabilities of the subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation adjustment
account in stockholders' equity. Gains and losses resulting from foreign
currency transactions are included in income and are not material for fiscal
1997 and 1996.
Software Development Costs
The Company capitalizes costs related to the development of certain software
products. Capitalization of costs begins when technological feasibility has
been established and ends when the product is available for general release
to customers. Included in other assets are capitalized costs of
approximately $360,000 for the year ended March 31, 1997. Approximately
$228,000 of this amount represents the cost of software developed by outside
parties on behalf of the Company. The remaining $178,000 represents
purchased technology.
Capitalized software development costs and purchased technology are amortized
using the straight-line method over three years, or the ratio of actual sales
to anticipated sales whichever is greater. Amortization of software
development costs and purchased technology charged to operations was
approximately $39,000 and $7,000 for the years ended March 31, 1997 and 1996,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at date of purchase to be considered cash equivalents.
Short-term Investments
The Company's short-term investments, consist of United States government
agency securities, classified as held-to-maturity, and preferred stock
marketable equity securities, classified as available for sale. In accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, investments classified as available for sale have been recorded
at fair value and investments classified as held to maturity are reported at
amortized cost. Unrealized gains or losses on such investments as of March
31, 1997 have been recorded as a separate component of stockholders' equity.
All realized gains and losses are computed on the specific identification
basis.
Income Taxes
The Company provides for income taxes using the asset and liability method.
Deferred tax assets and liabilities arise from temporary differences between
the tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
25
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net Income per Share and Pro Forma Net Income per Share
Net income per share for the year ended March 31, 1997 was determined, in
accordance with the treasury stock method, by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during the period. Fully diluted earnings per share approximated primary
earnings per share for the years ended March 31, 1997 and 1996. Unaudited pro
forma net income per share for the year ended March 31, 1996 was determined
by dividing applicable pro forma net income amounts by the weighted average
number of common and common equivalent shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share,
effective for interim and annual periods beginning after December 15, 1997.
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and simplifies the standards for computing EPS currently found
in Accounting Principles Board ("APB") Opinion No. 15, Earnings Per Share.
Common stock equivalents under APB Opinion No. 15, with the exception of
contingently issuable shares (shares issuable for little or no cash
consideration), are not included in the calculation of basic EPS. Under SFAS
No. 128, contingently issuable shares are included in the calculation of
diluted EPS. Early adoption of this Statement is not permitted. The Company
anticipates that adoption of this Statement will not have a material impact
on the consolidated financial statements.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the following useful lives:
Buildings and improvements 39 years
Computer equipment 5 years
Office equipment and furniture 5-7 years
Long lived assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of on April 1,
1996. In accordance with SFAS No. 121, long-lived assets to be held and
goodwill are reviewed for events or changes in circumstances that indicate
that their carrying value may not be recoverable through cash flows. If the
Company determines that the carrying value of a given asset is deemed not to
be recoverable the asset will be adjusted to its fair market value. Adoption
of this Statement did not have a material impact on the Company's
consolidated financial statements.
Goodwill
The Company amortizes costs in excess of fair value of net assets of
businesses acquired using the straight-line method over the estimated useful
lives of the business acquired, usually a period of five years. Goodwill
amortization was $167,000 and $18,000 for the years ended March 31, 1997 and
1996, respectively.
Stock-based compensation
Prior to April 1, 1996, the Company accounted for its stock option plans in
accordance with "APB" Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On April 1, 1996, the Company
adopted "SFAS No. 123" Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma net income per share
26
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
disclosures for employee stock option grants made as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
(2) Acquisitions
During fiscal 1997 and 1996, the Company effected one and three
acquisition(s), respectively. These acquisitions were accounted for using
the purchase method of accounting and, accordingly, the results of operations
of the acquired assets and assumed liabilities have been included with those
of the Company since the effective dates of the respective acquisitions. All
assets acquired and liabilities assumed were recorded at their estimated fair
market values at the date of acquisition in the consolidated balance sheet.
QSE (Bristol) Limited
On December 3, 1996, the Company acquired all of the outstanding stock of QSE
(Bristol) Limited, a software manufacturer and marketer. The purchase, for
approximately $1,590,000 in cash, was made by Research Engineers (Europe)
Limited, the Company's United Kingdom subsidiary. This transaction was
accounted for as a purchase. On the date of acquisition, the Company
determined that no alternative future use existed for the research and
development in progress acquired and charged $715,000 to operations.
Purchase price allocations for the acquisition of QSE (Bristol) Limited is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
QSE
-------
<S> <C>
Current assets, including
cash of $54 $ 278
Property and equipment 44
Goodwill 977
In-process research
and development 715
Current liabilities (334)
Non-current liabilities (90)
-------
$ 1,590
=======
</TABLE>
EGIS, GmbH
On November 1, 1995, the Company acquired all of the assets and liabilities
of EGIS GmbH, a Germany-based software developer and marketer. The purchase
price of the net acquired assets included a cash payment of approximately
$35,000 and assumption of a bank loan for approximately $130,000. On the
date of acquisition, the Company determined that no alternative future use
existed for the research and development in progress acquired and charged
$52,000 to operations.
27
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Das Consulting, Inc.
On September 8, 1995, the Company acquired all of the assets and liabilities
of Das Consulting, Inc., a software manufacturer and marketer. The purchase
price of the net acquired assets included a cash payment of $26,000 and the
issuance of 17,686 shares of REI common stock with a fair market value of
$16,000. On the date of acquisition, the Company determined that no
alternative future use existed for the research and development in progress
acquired and charged $37,000 to operations.
ADLPipe
On March 22, 1996, the Company acquired all of the assets and liabilities of
ADLPipe, a software manufacturer and marketer. The purchase price of the net
acquired assets included a cash payment of $200,000 and the issuance of
26,290 shares of REI common stock valued at $200,000. The former
shareholders of ADLPipe retained the right to demand that the Company
purchase the shares acquired for a period up to five months following an
initial public offering of the Company's common stock. The former
shareholders did not exercise this right.
Purchase price allocations for the purchases made during 1996 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
Das
EGIS Consulting ADLPipe Total
------ ---------- ------- -----
<S> <C> <C> <C> <C>
Current assets $ 94 -- 86 180
Property and equipment 21 24 28 73
Goodwill 214 -- 300 514
In-process research
and development 52 37 -- 89
Current liabilities (216) (19) (14) (249)
Non-current liabilities (130) -- -- (130)
----- --- --- ----
$ 35 42 400 477
====== === === ====
</TABLE>
Following are unaudited pro forma consolidated results of operations as if
the above acquisitions had taken place on April 1, of each fiscal year, (in
thousands):
<TABLE>
<CAPTION>
Year ended Year ended
March 31, March 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $ 11,529 7,900
Income before income taxes 1,175 696
Net income 818 654
Net income per common and
common equivalent share .15 .16
</TABLE>
28
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Short-Term Investments
The Company's fixed maturity short-term investments that are classified as
held-to-maturity at March 31, 1997 consist entirely of debt securities issued
by the United States or its agencies and are recorded at an amortized cost of
approximately $1,015,000, which also approximates fair value. There were no
material unrealized holding gains or losses at March 31, 1997.
The Company's preferred stock investments that are classified as available-
for-sale at March 31, 1997 are recorded at an aggregate fair value of
$686,000. The net unrealized holding gains at March 31, 1997 were
approximately $6,000 and have been accounted for as a separate component of
stockholders' equity.
(4) Property, Plant and Equipment
Property, plant and equipment, at cost, as of March 31, 1997 consists of the
following (in thousands):
<TABLE>
<S> <C>
Land $ 540
Building 1,673
Office and computer equipment, software
and furniture 1,809
--------
4,022
Accumulated depreciation (1,299)
--------
Net property, plant and equipment $ 2,723
========
</TABLE>
(5) Line of Credit and Bank Debt
Long-term bank debt consists of the following at March 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Mortgage payable to bank, monthly payments of principal plus
interest at 2.25% over the LIBOR Base Rate (7.97% at March 31,
1997) through maturity of April 2007, secured by real estate
owned by the Company $ 1,800
Loan payable to bank, monthly payments of principal plus interest
at .5% over the bank's prime rate (9.00% at March 31, 1997)
through maturity of April 2000, secured by certain computer
equipment owned by the Company 179
Loan payable to bank, monthly payments of principal plus interest
at 9.25% through maturity of August 1998, secured by certain
equipment owned by the Company 89
Other 81
-------
Total 2,149
Less current portion 187
-------
$ 1,962
=======
</TABLE>
29
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On November 26, 1996, the Company obtained a $500,000 line of credit from a
bank expiring on August 31, 1997. There were no amounts outstanding at March
31, 1997. The credit facility bears interest at the banks prime rate (8.5%
at March 31, 1997) and is collateralized by all assets of the Company.
The line of credit contains certain restrictive covenants, all of which have
been complied with or waived by the bank.
The long-term bank debt matures in each of the following years ending March
31 (in thousands):
<TABLE>
<S> <C>
1998 $ 187
1999 153
2000 122
2001 54
2002 52
Thereafter 1,581
-------
$ 2,149
=======
</TABLE>
(6) Stockholders' Equity
Initial Public Offering
On July 26, 1996, the Company completed its initial public offering of
1,300,000 shares of its common stock at $5.00 per share (1,495,000 shares
after exercise of the underwriters over-allotment option on September 3,
1996). The net proceeds of the offering (including exercise of the
underwriters over-allotment option) after deducting underwriter's commissions
and offering costs were approximately $6,469,000.
Stock Option Plans
In April 1996, the Company adopted the Research Engineers, Inc 1996 Stock
Option Plan (the "1996 Plan"). The 1996 Plan provides for the granting of
Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQOs) of up to
294,000 shares of the Company's common stock. These options will generally
vest over 3 years, though the vesting periods vary from person to person.
The options are exercisable subject to continued employment and other
conditions. The 1996 Plan will terminate in April 2006. As of March 31,
1997 there were 28,750 options available for grant under the 1996 Plan and no
options were exercisable.
In November 1996, the Board of Directors approved the repricing of 284,000 of
the Company's stock options granted under the 1996 Plan which had exercise
prices higher than the then market price of the Company's common stock. The
options were repriced from $5.00 to $2.75.
30
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of stock option activity related to the 1996
Plan (number of shares in thousands):
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
shares price
--------- --------
<S> <C> <C>
Outstanding at April 1, 1996 -- $ --
Grants 284 2.75
Forfeited (19) 2.75
-----
Outstanding at March 31, 1997 265 2.75
=====
</TABLE>
In February 1997, the Company adopted the Research Engineers, Inc 1997 Stock
Option Plan (the "1997 Plan"). The 1997 Plan provides for the granting of
Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQOs) of up to
300,000 shares of the Company's common stock. These options will generally
vest over 3 years, though the vesting periods vary from person to person.
The options are exercisable subject to continued employment and other
conditions. The 1997 Plan will terminate in February 2007. As of March 31,
1997, there were 247,000 options available for grant under the 1997 Plan and
no options were exercisable.
The following is a summary of stock option activity related to the 1997 Plan
(number of shares in thousands):
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
shares price
--------- --------
<S> <C> <C>
Outstanding at April 1, 1996 -- $ --
Grants 53 2.75
Forfeited -- 2.75
-----
Outstanding at March 31, 1997 53 2.75
=====
</TABLE>
As discussed in Note 1, the Company accounts for its stock option plans based
on the intrinsic value of a grant as of the date of the grant in accordance
with APB No. 25. Accordingly, no compensation expense has been recognized in
1997 or 1996 for options granted under the Company's stock option plans. Had
compensation cost been recognized in accordance with the fair value
provisions of SFAS No. 123, pro forma net income and net income per share for
1997 would have been $72,000 and $.01, respectively. The weighted average
fair value of each option grant, $1.34 for options granted in 1997, was
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: no dividend yield; expected
volatility of 48%; risk-free interest rate of 5.50%; and expected lives of 5
years.
At March 31, 1997, the weighted average remaining contractual life of
outstanding options was 9.04 years.
(7) Related Party Transactions
In October 1996, the Company loaned $37,500 to a stockholder, with principal
and accrued interest due in October 1997. Interest accrues at the rate of 8%
per annum. The stockholder has pledged his common stock in the Company as
collateral for this note. The note is included in notes and related party
loans receivable on the consolidated balance sheet.
31
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company leased a condominium used for office space from a stockholder on
a month-to-month basis during the year ended March 31, 1996. Included in
selling, general and administrative expense for the year ended March 31, 1996
is $8,000 for the leased property.
(8) Retirement Plan
The Company has adopted a qualified cash or deferred 401(k) retirement
savings plan. The plan covers all employees who have attained age 21. The
Company makes matching contributions to this plan based on 100% of the
employees' elective contributions up to a maximum of 6% of compensation. For
the years ended March 31, 1997 and 1996, Company contributions in the amount
of $74,000 and $55,000, respectively, were paid to the plan.
(9) Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases. The facility leases include options to extend the lease
terms and provisions for payment of property taxes, insurance and maintenance
expenses.
At March 31, 1997, future minimum annual rental commitments under these lease
obligations are as follows (in thousands):
<TABLE>
<S> <C>
Year ending March 31:
1998 $ 371
1999 271
2000 196
2001 56
2002 14
Thereafter 6
-------
$ 914
=======
</TABLE>
Rent expense was $315,000 and $136,000 for the years ended March 31, 1997 and
1996, respectively.
The Company leases space to third parties in a Company-owned building under
operating leases. Certain leases contain renewal options and provide for
reimbursement of certain operating expenses. Total additional rentals to be
received in future years are approximately $60,000 at March 31, 1997. Rental
income for the year ended March 31, 1997 and 1996, included in other (income)
expense in the accompanying consolidated statements of income, was $99,000
and $119,000, respectively.
Employment Agreements
The Company has entered into employment agreements with three officers of the
Company that provide for minimum annual salaries aggregating $520,000. The
agreements expire on May 31, 2001. In the event of termination of a contract
by the Company without cause, the Company would be required to pay continuing
salary payments for specified periods in accordance with the agreements.
32
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes
Prior to October 1, 1995, the Company elected to be taxed as an S Corporation
under the Internal Revenue Code. Effective October 1, 1995, the S
Corporation election was terminated and the Company has since been operated
as a C Corporation for tax purposes. The Company did not provide for Federal
income taxes during its operation as an S Corporation since the liability was
primarily that of the individual shareholders.
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1996
------- ------ ------
(Unaudited
Pro forma)
<S> <C> <C> <C>
Current:
Federal $ 144 202 233
State 51 44 32
Foreign 145 67 67
------- ------ ------
340 313 332
Deferred:
Federal 16 (228) (59)
State (14) (41) (11)
Foreign 6 -- --
------- ---- ----
8 (269) (70)
------- ---- ----
Total $ 348 44 262
======= ==== ====
</TABLE>
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 34% to income before taxes
as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31
---------------------------------------
1997 1996 1996
------ ------ ---------
(Unaudited
Pro forma)
<S> <C> <C> <C>
Income tax at statutory rate $ 194 258 258
State taxes, net of federal benefits 24 42 42
Effect of S Corporation termination -- (248) --
Research and development credits (30) (11) (41)
Foreign income tax rate differential (25) (12) (12)
In-process research and development 243
Provision to return adjustment (85)
Other 27 15 15
------ ---- ---
Total $ 348 44 262
====== ==== ===
</TABLE>
33
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The tax effects of temporary differences at March 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
Deferred tax assets:
Cash to accrual adjustment $ 227
State taxes 26
Accrued vacation 29
Allowance for doubtful accounts 18
Amortization of goodwill 17
------
Total deferred tax assets 317
Deferred tax liabilities:
Depreciation (49)
Other (7)
------
Total deferred tax liabilities (56)
------
Net deferred tax asset $ 261
======
</TABLE>
In assessing the realizability of the net deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. As of March
31, 1997, the Company had not provided a valuation allowance to reduce the
net deferred tax assets due to the Company's expectation of future taxable
income against which the deferred tax asset may be utilized.
Undistributed earnings of certain of the Company's foreign subsidiaries are
considered to be indefinitely reinvested and, accordingly, no provision for
United States federal and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both federal income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries.
34
<PAGE>
RESEARCH ENGINEERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Foreign Operations
The Company's operations are based worldwide through foreign subsidiaries and
branch offices in Germany, India, the United Kingdom, and Asia-Pacific. The
following are significant components of worldwide operations by geographic
location:
<TABLE>
<CAPTION>
For the year ended March 31
----------------------------
1997 1996
-------- -----
(in thousands)
<S> <C> <C>
Net revenue
Domestic $ 4,992 4,364
Europe 2,608 1,686
Asia-Pacific 3,423 1,273
-------- -----
Total net revenue $ 11,023 7,323
======== =====
Operating income
Domestic $ 103 698
Europe 83 99
Asia-Pacific 994 173
In-process research and development (715) (89)
-------- -----
Total operating income $ 465 881
======== =====
</TABLE>
Identifiable Assets
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
Domestic 8,995
Europe 1,802
Asia-Pacific 882
--------
Total identifiable assets $ 11,679
========
</TABLE>
35
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTOL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information appearing under the caption "Election of Directors," including
the subcaption "Compliance with Beneficial Ownership Reporting Rules," contained
in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders to
be held on September 4, 1997 (the "Proxy Statement") is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation" contained
in the Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Election of Directors," including
the subcaption "Principal Stockholders," contained in the Proxy Statement is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Relationships and Related
Transactions" contained in the Proxy Statement is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Research Engineers, Inc. 1996 Stock Option Plan*
10.2 Form of Nonqualified Stock Option Agreement pertaining to the
Plan (schedule of options issued pursuant to the Plan attached
thereto)*
10.3 Corporation Grant Deed dated February 15, 1994 executed by
ITL-PAC, Inc. a Delaware corporation in favor of the
Registrant, as filed in the Official Records of Orange County,
California on March1, 1994*
10.4 Deed of Trust With Assignment of Rents dated February 23,
1994, by and between the Registrant, as Trustor, Bank of Yorba
Linda, as Trustee, and Bank of Yorba Linda, as Beneficiary, as
filed in the Official Records of Orange County, California on
March 1, 1994*
36
<PAGE>
10.5 U.S. Small Business Administration Note dated February 23,
1994 in the principal amount of $1,000,000 (SBA Loan No.
CLPGP206903001SNA) made payable to Bank of Yorba Linda, and
related documents*
10.6 Deed of Trust With Assignment of Rents dated February 22,
1994, by and between the Registrant, as Trustor, North County
Trust Deed, Inc., as Trustee, and Rancho Vista National Bank,
as Beneficiary, as filed in the Official Records of Orange
County, California on March 1, 1994*
10.7 Promissory Noted dated February 22, 1994 in the principal
amount of $750,000 (Loan No. 0510223-01) made payable to
Rancho Vista National Bank, and related documents*
10.8 Promissory Note in the principal amount of $140,000 dated
February 15, 1995 (Loan No. LA01343832) made to the order of
Wells Fargo Bank, National Association*
10.9 Promissory Note in the principal amount of $150,000 dated
February 15, 1995 (Loan No. LA01343831) made to the or order
of Wells Fargo Bank, National Association*
10.11 Business Loan Agreement dated may 14, 1993 (Loan No.
LA00594522) between the Company and Wells Fargo Bank,
National Association*
10.12 Commercial Security Agreement dated May 14, 1993 (Loan No.
LA00594522) between the Company and Wells Fargo Bank,
National Association*
10.13 Promissory Note dated March 1, 1994 in the principal amount
of $271,000 made to the order of Amrit K. Das*
10.14 Promissory Noted dated March 1, 1994 in the principal amount
of $271,000 made to the order of Santanu Das*
10.15 Promissory Noted dated March 1, 1994 in the principal amount
of $55,000 made to the order of Sormithsa Das*
10.16 Agreement and Plan of Merger dated as of April 26, 1996, by
and between Research Engineers, Inc. a New Jersey
corporation, and the Registrant*
10.17 Agreement and Plan of Reorganization dated as of March 8,
1996, by and among the Registrant ADLPipe, Inc., a
Massachusetts corporation, Chiin-Kun Hou and Peter E. Lewis*
10.18 Restated and Amended Agreement of Merger dated as of
September 10, 1995 by and between the Registrant and Das
Consulting, Inc.*
10.19 Software License and Distribution Agreement dated as of March
8, 1996 by and between Softdesk, Inc., a Delaware
corporation, and the Registrant*
10.20 Software Development Agreement dated as of June 22, 1995
between RotorDynamics-Seaal Research, a California
corporation and the Registrant*
10.21 Software Development Agreement dated September 13, 1995, by
and between the Registrant and Geometric Software Services
Co. Ltd.*
10.22 Technology Transfer Agreement dated September 13, 1995, by
and between the Registrant and Geometric Software Services
Co. Ltd.*
37
<PAGE>
10.23 Employment Agreement dated May 1, 1996, by and between the
Registrant and Armit K. Das*
10.24 Employment Agreement dated May 1, 1996, by and between the
Registrant and Jyoti Chatterjee*
10.25 Employment Agreement dated May 1, 1996, by and between the
Registrant and Clara Y. M. Young*
10.26 QSE (Bristol) Limited Share Sale and Purchase Agreement**
10.27 Research Engineers, Inc. 1997 Stock Option Plan
10.28 Business Loan agreement dated October 15, 1996 between the
Company and Union Bank of California N.A.
10.29 Security agreement dated October 3, 1996 between the Company
and Union Bank of California N.A.
10.30 Promissory Note dated October 15, 1996 made to the order of
Union Bank of California N.A.
10.31 Promissory Note dated March 20, 1997 in the principal amount
of $1,800,000 made payable to Union Bank of California N.A
10.32 Promissory Note dated October 15, 1996 in the principal
amount of $500,000 made payable to Union Bank of California
N.A
23 Consent of Independent Auditors
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed a Form 8-K on February 14, 1997, regarding the
acquisition of QSE (Bristol) Limited
On March 7, 1997, Registrant filed a Form 8-K/A No. 1 amending its
Form 8-K dated February 14, 1997, relating to the Company's
acquisition of QSE (Bristol) Limited
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 dated July 25, 1996.
** Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K filed on
February 14, 1997.
38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RESEARCH ENGINEERS, INC
Dated: June 27, 1997 By: /S/Amrit K. Das
-----------------------------------------
Amrit K. Das, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---------------------------------- -------------------------------- ---------------
<S> <C> <C>
/S/ AMRIT K. DAS Chairman of the Board, June 27, 1997
- ---------------------------------- President, Chief Executive
Amrit K. Das Officer and Director
(principal executive officer)
/S/ JYOTI CHATTERJEE Executive Vice President, June 27, 1997
- ---------------------------------- Chief Operating Officer and
Jyoti Chatterjee Director
/S/ BRIAN PAUL Secretary and Chief Financial June 27, 1997
- ---------------------------------- Officer (principal financial
Brian Paul and accounting officer)
/S/ SANTANU DAS Director June 27, 1997
- ----------------------------------
Santanu Das
/S/ DAN W. HEIL Director June 27, 1997
- ----------------------------------
Dan W. Heil
/S/ BRUCE CUMMINGS Director June 27, 1997
- ----------------------------------
Bruce Cummings
</TABLE>
39
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No.
- -----------
Exhibit 10.1 Research Engineers, Inc. 1996 Stock Option Plan*
Exhibit 10.2 Form of Nonqualified Stock Option Agreement pertaining to the
Plan (schedule of options issued pursuant to the Plan attached
thereto)*
Exhibit 10.3 Corporation Grant Deed dated February 15, 1994 executed by ITL-
PAC, Inc. a Delaware corporation in favor of the Registrant, as
filed in the Official Records of Orange County, California on
March 1, 1994*
Exhibit 10.4 Deed of Trust With Assignment of Rents dated February 23, 1994,
by and between the Registrant, as Trustor, Bank of Yorba Linda,
as Trustee, and Bank of Yorba Linda, as Beneficiary, as filed in
the Official Records of Orange County, California on March 1,
1994*
Exhibit 10.5 U.S. Small Business Administration Note dated February 23, 1994
in the principal amount of $1,000,000 (SBA Loan No.
CLPGP206903001SNA) made payable to Bank of Yorba Linda, and
related documents*
Exhibit 10.6 Deed of Trust With Assignment of Rents dated February 22, 1994,
by and between the Registrant, as Trustor, North County Trust
Deed, Inc., as Trustee, and Rancho Vista National Bank, as
Beneficiary, as filed in the Official Records of Orange County,
California on March 1, 1994*
Exhibit 10.7 Promissory Noted dated February 22, 1994 in the principal amount
of $750,000 (Loan No. 0510223-01) made payable to Rancho Vista
National Bank, and related documents*
Exhibit 10.8 Promissory Note in the principal amount of $140,000 dated
February 15, 1995 (Loan No. LA01343832) made to the order of
Wells Fargo Bank, National Association*
Exhibit 10.9 Promissory Note in the principal amount of $150,000 dated
February 15, 1995 (Loan No. LA01343831) made to the or order of
Wells Fargo Bank, National Association*
Exhibit 10.11 Business Loan Agreement dated may 14, 1993 (Loan No. LA00594522)
between the Company and Wells Fargo Bank, National Association*
Exhibit 10.12 Commercial Security Agreement dated May 14, 1993 (Loan No.
LA00594522) between the Company and Wells Fargo Bank, National
Association*
Exhibit 10.13 Promissory Note dated March 1, 1994 in the principal amount of
$271,000 made to the order of Amrit K. Das*
Exhibit 10.14 Promissory Noted dated March 1, 1994 in the principal amount of
$271,000 made to the order of Santanu Das*
Exhibit 10.15 Promissory Noted dated March 1, 1994 in the principal amount of
$55,000 made to the order of Sormithsa Das*
Exhibit 10.16 Agreement and Plan of Merger dated as of April 26, 1996, by and
between Research Engineers, Inc. a New Jersey corporation, and
the Registrant*
40
<PAGE>
Exhibit 10.17 Agreement and Plan of Reorganization dated as of March 8, 1996,
by and among the Registrant ADLPipe, Inc., a Massachusetts
corporation, Chiin-Kun Hou and Peter E. Lewis*
Exhibit 10.18 Restated and Amended Agreement of Merger dated as of September
10, 1995 by and between the Registrant and Das Consulting, Inc.*
Exhibit 10.19 Software License and Distribution Agreement dated as of March 8,
1996 by and between Softdesk, Inc., a Delaware corporation, and
the Registrant*
Exhibit 10.20 Software Development Agreement dated as of June 22, 1995 between
RotorDynamics-Seaal Research, a California corporation and the
Registrant*
Exhibit 10.21 Software Development Agreement dated September 13, 1995, by and
between the Registrant and Geometric Software Services Co. Ltd.*
Exhibit 10.22 Technology Transfer Agreement dated September 13, 1995, by and
between the Registrant and Geometric Software Services Co. Ltd.*
Exhibit 10.23 Employment Agreement dated May 1, 1996, by and between the
Registrant and Armit K. Das*
Exhibit 10.24 Employment Agreement dated May 1, 1996, by and between the
Registrant and Jyoti Chatterjee*
Exhibit 10.25 Employment Agreement dated May 1, 1996, by and between the
Registrant and Clara Y. M. Young*
Exhibit 10.26 QSE (Bristol) Limited - Share sale and Purchase Agreement
(incorporated by reference to Exhibit 2.1 to Registrant's Form
8-K filed on February 14, 1997)**
Exhibit 10.27 Research Engineers, Inc. 1997 Stock Option Plan
Exhibit 10.28 Business Loan agreement dated October 15, 1996 between the
Company and Union Bank of California N.A.
Exhibit 10.29 Security agreement dated October 3, 1996 between the Company and
Union Bank of California N.A.
Exhibit 10.30 Promissory Note dated October 15, 1996 made to the order of Union
Bank of California N.A.
Exhibit 10.31 Promissory Note dated March 20, 1997 in the principal amount of
$1,800,000 made payable to Union Bank of California N.A
Exhibit 10.32 Promissory Note dated October 15, 1996 in the principal amount of
$500,000 made payable to Union Bank of California N.A
Exhibit 23 Consent of Independent Auditors
Exhibit 27.1 Financial Data Schedule
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 dated July 25, 1996.
** Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K filed on
February 14, 1997.
41
<PAGE>
EXHIBIT 10.27
RESEARCH ENGINEERS, INC. 1997 STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this 1997 Stock Option Plan
("Plan") of Research Engineers, Inc., a Delaware corporation ("Company"), is to
provide the Company with a means of attracting and retaining the services of
highly motivated and qualified directors and key personnel. The Plan is intended
to advance the interests of the Company by affording to directors and key
employees, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. in addition, the Plan contemplates the opportunity for investment in
the Company by employees of companies that do business with the Company. For
purposes of this Plan, the term Company shall include subsidiaries, if any, of
the Company.
2. Legal Compliance. It is the intent of the Plan that all options granted
under it ("Options") shall be either "Incentive Stock Options" ("ISOs"), as such
term is defined in Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), or non-qualified stock options ("NQOs"); provided, however, ISOs shall
be granted only to employees of the Company. An Option shall be identified as an
ISO or an NQO in writing in the document or documents evidencing the grant of
the Option. All Options that are not so identified as ISOs are intended to be
NQOs. In addition, the Plan provides for the grant of NQOs to employees of
companies that do business with the Company. It is the further intent of the
Plan that it conform in all respects with the requirements of Rule 16b-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended ("Rule 16b-3"). To the extent that any aspect of the Plan or its
administration shall at any time be viewed as inconsistent with the requirements
of Rule 16b-3 or, in connection with ISOs, the Code, such aspect shall be deemed
to be modified, deleted or otherwise changed as necessary to ensure continued
compliance with such provisions.
3. Administration of the Plan.
3.1 Plan Committee. The Plan shall be administered by a committee
("Committee"). The members of the Committee shall be appointed from time to time
by the Board of Directors of the Company ("Board") and shall consist of not less
than two (2) nor more than five (5) persons. Such persons shall be directors of
the Company.
3.2 Grants of Options by the Committee. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and the Option period. The Committee shall determine the form of
option agreement to evidence the foregoing terms and conditions of each Option,
which need not be identical, in the form provided for in Section 7. Such option
agreement may include such other provisions as the Committee may deem necessary
or desirable consistent with the Plan, the Code and Rule 16b-3.
3.3 Committee Procedures. The Committee from time to time may adopt
such rules and regulations for carrying out the purposes of the Plan as it may
deem proper and in the best interests of the Company. The Committee shall keep
minutes of its meetings and records of its actions. A majority of the members of
the Committee shall constitute a quorum for the transaction of any business by
the Committee. The Committee may act at any time by an affirmative vote of a
majority of those members voting. Such vote may be taken at a meeting (which may
be conducted in person or by any telecommunication medium) or by written consent
of Committee members without a meeting.
3.4 Finality of Committee Action. The Committee shall resolve all
questions arising under the Plan and option agreements entered into pursuant to
the Plan. Each determination, interpretation, or other action made or taken by
the Committee shall be final and conclusive and binding on all persons,
including, without limitation, the Company, its shareholders, the Committee and
each of the members of the Committee, and the directors, officers and employees
of the Company, including Optionees and their respective successors in interest.
<PAGE>
3.5 Non-Liability of Committee Members. No Committee member shall be
liable for any action or determination made by him or her in good faith with
respect to the Plan or any Option granted under it.
4. Board Power to Amend, Suspend, or Terminate the Plan. The Board may,
from time to time, make such changes in or additions to the Plan as it may deem
proper and in the best interests of the Company and its shareholders. The Board
may also suspend or terminate the Plan at any time, without notice, and in its
sole discretion. Notwithstanding the foregoing, no such change, addition,
suspension, or termination by the Board shall (i) materially impair any option
previously granted under the Plan without the express written consent of the
optionee; or (ii) materially increase the number of shares subject to the Plan,
materially increase the benefits accruing to optionees under the Plan,
materially modify the requirements as to eligibility to participate in the Plan
or alter the method of determining the option exercise price described in
Section 8, without shareholder approval.
5. Shares Subject to the Plan. For purposes of the Plan, the Committee is
authorized to grant Options for up to 300,000 shares of the Company's common
stock ("Common Stock"), or the number and kind of shares of stock or other
securities which, in accordance with Section 13, shall be substituted for such
shares of Common Stock or to which such shares shall be adjusted. The Committee
is authorized to grant Options under the Plan with respect to such shares. Any
or all unsold shares subject to an Option which for any reason expires or
otherwise terminates (excluding shares returned to the Company in payment of the
exercise price for additional shares) may again be made subject to grant under
the Plan.
6. Optionees. Options shall be granted only to officers, directors or key
employees of the Company or employees of companies that do business with the
Company designated by the Committee from time to time as Optionees. Any Optionee
may hold more than one option to purchase Common Stock, whether such option is
an Option held pursuant to the Plan or otherwise. An Optionee who is an employee
of the Company ("Employee Optionee") and who holds an Option must remain a
continuous full or part-time employee of the Company from the time of grant of
the Option to him until the time of its exercise, except as provided in Section
10.3.
7. Grants of Options. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall be an ISO
or an NQO. The terms and conditions of Options granted under the Plan may differ
from one another as the Committee, in its absolute discretion, shall determine
as long as all Options granted under the Plan satisfy the requirements of the
Plan. Upon determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing such Option shall be given to
the Optionee, specifying the number of shares subject to the Option, the Option
exercise price, whether the Option is an ISO or an NQO, and the other individual
terms and conditions of such Option. Such option agreement may incorporate
generally applicable provisions from the Plan, a copy of which shall be provided
to all Optionees at the time of their initial grants under the Plan. The Option
shall be deemed granted as of the date specified in the grant resolution of the
Committee, and the option agreement shall be dated as of the date of such
resolution. Notwithstanding the foregoing, unless the Committee consists solely
of non-employee directors, any Option granted to an executive officer, director
or 10% beneficial owner for purposes of Section 16 of the Securities Exchange
Act of 1 934, as amended ("Section 16 of the 1934 Act"), shall either be (a)
conditioned upon the Optionee's agreement not to sell the shares of Common Stock
underlying the Option for at least six (6) months after the date of grant or (b)
approved by the entire Board or by the shareholders of the Company.
8. Option Exercise Price. The price per share to be paid by the Optionee
at the time an ISO is exercised shall not be less than one hundred percent
(100/o) of the Fair Market Value (as hereinafter defined) of one share of the
optioned Common Stock on the date on which the Option is granted. No ISO may be
granted under the Plan to any person who, at the time of such grant, owns
(within the meaning of Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of any parent thereof, unless the exercise price of such ISO is
at least equal to one hundred and ten percent (110%) of Fair Market Value on the
date of grant. The price per share to be paid by the Optionee at the time an NQO
is exercised shall not be less than eighty-five percent (85%) of the Fair Market
Value on the date on which the NQO is granted, as determined by the Committee.
For purposes of the Plan, the "Fair Market Value" of a Share of the Company's
Common Stock as of a given date shall be: (i) the closing price of a share of
the Company's Common Stock on the principal exchange on which shares of the
Company's Common Stock are then trading, if any, on the day immediately
preceding such date, or, if shares were not traded on such date, then on the
<PAGE>
next preceding trading day during which a sale occurred; or (ii) if the
Company's Common Stock is not traded on an exchange but is quoted on Nasdaq or a
successor quotation system, (1) the last sales price (if the Common Stock is
then listed as a National Market Issue under the Nasdaq National Market System)
or (2) the closing representative bid price (in all other cases) for the Common
Stock on the day immediately preceding such date as reported by Nasdaq or such
successor quotation system; or (iii) if the Company's Common Stock is not
publicly traded on an exchange and not quoted on Nasdaq or a successor quotation
system, the closing bid price for the Common Stock on such date as determined in
good faith by the Committee; or (iv) if the Company's Common Stock is not
publicly traded, the fair market value established by the Committee acting in
good faith. In addition, with respect to any ISO, the Fair Market Value on any
given date shall be determined in a manner consistent with any regulations
issued by the Secretary of the Treasury for the purpose of determining fair
market value of securities subject to an ISO plan under the Code.
9. Ceiling of ISO Grants. The aggregate Fair Market Value (determined at
the time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan of the Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100,000. If an Optionee
holds such incentive stock options that become first exercisable (including as a
result of acceleration of exercisability under the Plan) in any one year for
shares having a Fair Market Value at the date of grant in excess of $100,000,
then the most recently granted of such ISOs, to the extent that they are
exercisable for shares having an aggregate Fair Market Value in excess of such
limit, shall be deemed to be NQOs.
10. Duration, Exercisability, and Termination of Options.
10.1 Option Period. The option period shall be determined by the
Committee with respect to each Option granted. In no event, however, may the
option period exceed ten (10) years from the date on which the Option is
granted, or five (5) years in the case of a grant of an ISO to an Optionee who
is a ten percent (10%) shareholder at the date on which the Option is granted as
described in Section 8.
10.2 Exercisability of Options. Each Option shall be exercisable in
whole or in consecutive installments, cumulative or otherwise, during its term
as determined in the discretion of the Committee.
10.3 Termination of Options due to Termination of Employment,
Disability, or Death of Optionee; Termination for "Cause", or Resignation in
Violation of an Employment Agreement. All Options granted under the Plan to any
Employee Optionee shall terminate and may no longer be exercised if the Employee
Optionee ceases, at any time during the period between the grant of the Option
and its exercise, to be an employee of the Company; provided, however, that the
Committee may alter the termination date of the Option if the Optionee transfers
to an affiliate of the Company. Notwithstanding the foregoing, (i) if the
Employee Optionee's employment with the Company shall have terminated for any
reason (other than involuntary dismissal for "cause" or voluntary resignation in
violation of any agreement to remain in the employ of the Company, including,
without limitation, any such agreement pursuant to Section 15), he may, at any
time before the expiration of three (3) months after such termination or before
expiration of the Option, whichever shall first occur, exercise the Option (to
the extent that the Option was exercisable by him on the date of the termination
of his employment); (ii) if the Employee Optionee's employment shall have
terminated due to disability (as defined in Section 22(e)(3) of the Code and
subject to such proof of disability as the Committee may require), such Option
may be exercised by the Employee Optionee (or by his guardian(s), or
conservator(s), or other legal representative(s)) before the expiration of
twelve (12) months after such termination or before expiration of the Option,
whichever shall first occur (to the extent that the Option was exercisable by
him on the date of the termination of his employment); (iii) in the event of the
death of the Employee Optionee, an Option exercisable by him at the date of his
death shall be exercisable by his legal representative(s), legatee(s), or
heir(s), or by his beneficiary or beneficiaries so designated by him, as the
case may be, within twelve (12) months after his death or before the expiration
of the Option, whichever shall first occur (to the extent that the Option was
exercisable by him on the date of his death); and (iv) if the Employee
Optionee's employment is terminated for "cause" or in violation of any agreement
to remain in the employ of the Company, including, without limitation, any such
agreement pursuant to Section 14, his Option shall terminate immediately upon
termination of employment, and such Option shall be deemed to have been
forfeited by the Optionee. For purposes of the Plan, "cause" may include,
without limitation, any illegal or
<PAGE>
improper conduct (1) which injures or impairs the reputation, goodwill, or
business of the Company; (2) which involves the misappropriation of funds of the
Company, or the misuse of data, intormation, or documents acquired in connection
with employment by the Company; or (3) which violates any other directive or
policy promulgated by the Company. A termination for "cause" may also include
any resignation in anticipation of discharge for "cause" or resignation accepted
by the Company in lieu of a formal discharge for "cause."
11. Manner of Option Exercise; Rights and Obligations of Optionees.
11.1 Written Notice of Exercise. An Optionee may elect to exercise an
Option in whole or in part, from time to time, subject to the terms and
conditions contained in the Plan and in the agreement evidencing such Option, by
giving written notice of exercise to the Company at its principal executive
office.
11.2 Cash Payment for Optioned Shares. If an Option is exercised for
cash, such notice shall be accompanied by a cashier's or personal check, or
money order, made payable to the Company for the full exercise price of the
shares purchased.
11.3 Stock Swap Feature. At the time of the Option exercise, and
subject to the discretion of the Committee to accept payment in cash only, the
Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. If the Optionee elects to pay the total purchase price in whole or in
part with previously acquired shares of Common Stock, the value of such shares
shall be equal to their Fair Market Value on the date of exercise, determined by
the Committee in the same manner used for determining Fair Market Value at the
time of grant for purposes of Section 8.
11.4 Investment Representation for Non-Registered Shares and Legality
of Issuance. The receipt of shares of Common Stock upon the exercise of an
Option shall be conditioned upon the Optionee (or any other person who exercises
the Option on his or her behalf as permitted by Section 10.3) providing to the
Committee a written representation that, at the time of such exercise, it is the
intent of such person(s) to acquire the shares for investment only and not with
a view toward distribution. The certificate for unregistered shares issued for
investment shall be restricted by the Company as to transfer unless the Company
receives an opinion of counsel satisfactory to the Company to the effect that
such restriction is not necessary under then pertaining law. The providing of
such representation and such restrictions on transfer shall not, however, be
required upon any person's receipt of shares of Common Stock under the Plan in
the event that, at the time of grant of the Option relating to such receipt or
upon such receipt, whichever is the appropriate measure under applicable federal
or state securities laws, the shares subject to the Option shall be (i) covered
by an effective and current registration statement under the Securities Act of
1933, as amended, and (ii) either qualified or exempt Com qualification under
applicable state securities laws. The Company shall, however, under no
circumstances be required to sell or issue any shares under the Plan if, in the
opinion of the Committee, (i) the issuance of such shares would constitute a
violation by the Optionee or the Company of any applicable law or regulation of
any governmental authority, or (ii) the consent or approval of any governmental
body is necessary or desirable as a condition of, or in connection with, the
issuance of such shares.
11.5 Shareholder Rights of Optionee. Upon exercise, the Optionee (or
any other person who exercises the Option on his behalf as permitted by Section
10.3) shall be recorded on the books of the Company as the owner of the shares,
and the Company shall deliver to such record owner one or more duly issued stock
certificates evidencing such ownership. No person shall have any rights as a
shareholder with respect to any shares of Common Stock covered by an Option
granted pursuant to the Plan until such person shall have become the holder of
record of such shares. Except as provided in Section 13, no adjustments shall be
made for cash dividends or other distributions or other rights as to which there
is a record date preceding the date such person becomes the holder of record of
such shares.
11.6 Holding Periods for Tax Purposes. The Plan does not provide that
an Optionee must hold shares of Common Stock acquired under the Plan for any
minimum period of time. Optionees are urged to consult with their own tax
advisors with respect to the tax consequences to them of their individual
participation in the Plan.
<PAGE>
12. Successive Grants. Successive grants of Options may be made to any
Optionee under the Plan.
13. Adjustments.
(a) If the outstanding Common Stock shall be hereafter increased or
decreased, or changed into or exchanged for a different number or kind of shares
or other securities of the Company or of another corporation, by reason of a
recapitalization, reclassification, reorganization, merger, consolidation, share
exchange, or other business combination in which the Company is the surviving
parent corporation, stock split-up, combination of shares, or dividend or other
distribution payable in capital stock or rights to acquire capital stock,
appropriate adjustment shall be made by the Committee in the number and kind of
shares for which options may be granted under the Plan. In addition, the
Committee shall make appropriate adjustment in the number and kind of shares as
to which outstanding and unexercised options shall be exercisable, to the end
that the proportionate interest of the holder of the option shall, to the extent
practicable, be maintained as before the occurrence of such event. Such
adjustment in outstanding options shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the exercise price per share.
(b) In the event of the dissolution or liquidation of the Company, any
outstanding and unexercised options shall terminate as of a future date to be
fixed by the Committee.
(c) In the event of a Reorganization (as hereinafter defined), then,
(i) If there is no plan or agreement with respect to the
Reorganization ("Reorganization Agreement"), or if the Reorganization Agreement
does not specifically provide for the adjustment, change, conversion, or
exchange of the outstanding and unexercised options for cash or other property
or securities of another corporation, then anv outstanding and unexercised
options shall terminate as of a future date to be fixed by the Committee; or
(ii) If there is a Reorganization Agreement, and the
Reorganization Agreement specifically provides for the adjustment, change,
conversion, or exchange of the outstanding and unexercised options for cash or
other property or securities of another corporation, then the Committee shall
adjust the shares under such outstanding and unexercised options, and shall
adjust the shares remaining under the Plan which are then available for the
issuance of options under the Plan if the Reorganization Agreement makes
specific provisions therefor, in a manner not inconsistent with the provisions
of the Reorganization Agreement for the adjustment, change, conversion, or
exchange of such options and shares.
(d) The term "Reorganization" as used in this Section 13 shall mean
any reorganization, merger, consolidation, share exchange, or other business
combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any options, or the
shares subject thereto, in any Reorganization Agreement which it does adopt.
(e) The Committee shall provide to each optionee then holding an
outstanding and unexercised option not less than thirty (30) calendar days'
advanced written notice of any date fixed by the Committee pursuant to this
Section 13 and of the terms of any Reorganization Agreement providing for the
adjustment, change, conversion, or exchange of outstanding and unexercised
options. Except as the Committee may otherwise provide, each optionee shall have
the right during such period to exercise his option only to the extent that the
option was exercisable on the date such notice was provided to the optionee.
Any adjustment to any outstanding ISO pursuant to this Section 13, if
made by reason of a transaction described in Section 424(a) of the Code, shall
be made so as to conform to the requirements of that Section and the regulations
thereunder. If any other transaction described in Section 424(a) of the Code
affects the Common Stock subject to any unexercised ISO theretofore granted
under the Plan (hereinafter for purposes of this
<PAGE>
Section 13 referred to as the "old option"), the Board of Directors of the
Company or of any surviving or acquiring corporation may take such action as it
deems appropriate, in conformity with the requirements of that Code Section and
the regulations thereunder, to substitute a new option for the old option, in
order to make the new option, as nearly as may be practicable, equivalent to the
old option, or to assume the old option.
(f) No modification, extension, renewal, or other change in any option
granted under the Plan may be made, after the grant of such option, without the
Optionee's consent, unless the same is permitted by the provisions of the Plan
and the option agreement. In the case of an ISO, optionees are hereby advised
that certain changes may disqualify the ISO from being considered as such under
Section 422 of the Code, or constitute a modification, extension, or renewal of
the ISO under Section 424(h) of the Code.
(g) All adjustments and determinations under this Section 13 shall be
made by the Committee in good faith in its sole discretion.
14. Continued Employment. As determined in the sole discretion of the
Committee at the time of grant and if so stated in a writing signed by the
Company, each Option may -have as a condition the requirement of an Employee
Optionee to remain in the employ of the Company, or of its affiliates, and to
render to it his or her exclusive service, at such compensation as may be
determined from time to time by it, for a period not to exceed the term of the
Option, except for earlier termination of employment by or with the express
written consent of the Company or on account of disability or death. The failure
of any Employee Optionee to abide by such agreement as to any Option under the
Plan may result in the termination of all of his or her then outstanding Options
granted pursuant to the Plan. Neither the creation of the Plan nor the granting
of Option(s) under it shall be deemed to create a right in an Employee Optionee
to continued employment with the Company, and each such Employee Optionee shall
be and shall remain subject to discharge by the Company as though the Plan had
never come into existence. Except as specifically provided by the Committee in
any particular case, the loss of existing or potential profit in options granted
under this Plan shall not constitute an element of damages in the event of
termination of the employment of an employee even if the termination is in
violation of an obligation of the Company to the employee by contract or
otherwise.
15. Tax Withholding. The exercise of any Option granted under the Plan is
subject to the condition that if at any time the Company shall determine, in its
discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon such
exercise, then in such event, the exercise of the Option shall not be effective
unless such withholding shall have been effected or obtained in a manner
acceptable to the Company. When an Optionee is required to pay to the Company an
amount required to be withheld under applicable income tax laws in connection
with the exercise of any Option, the Optionee may, subject to the approval of
the Committee, which approval shall not have been disapproved at any time after
the election is made, satisfy the obligation, in whole or in part, by electing
to have the Company withhold shares of Common Stock having a value equal to the
amount required to be withheld. The value of the Common Stock withheld pursuant
to the election shall be determined by the Committee, in accordance with the
criteria set forth in Section 8, with reference to the date the amount of tax to
be withheld is determined. The Optionee shall pay to the Company in cash any
amount required to be withheld that would otherwise result in the withholding of
a fractional share. The election by an Optionee who is an officer of the Company
within the meaning of Section 16 of the 1934 Act, to be effective, must meet all
of the requirements of Section 16 of the 1934 Act.
16. Term of Plan.
16.1 Effective Date. Subject to shareholder approval, the Plan shall
become effective as of February 6, 1997.
16.2 Termination Date. Except as to options granted and outstanding
under the Plan prior to such time, the Plan shall terminate at midnight on
February 5, 2007, and no Option shall be granted after that time. Options then
outstanding may continue to be exercised in accordance with their terms. The
Plan may be suspended or terminated at any earlier time by the Board within the
limitations set forth in Section 4.
<PAGE>
17. Non-Exclusivity of the Plan. Nothing contained in the Plan is intended
to amend, modify, or rescind any previously approved compensation plans,
programs or options entered into by the Company. This Plan shall be construed to
be in addition to and independent of any and all such other arrangements.
Neither the adoption of the Plan by the Board nor the submission of the Plan to
the shareholders of the Company for approval shall be construed as creating any
limitations on the power or authority of the Board to adopt, with or without
shareholder approval, such additional or other compensation arrangements as the
Board may from time to time deem desirable.
18. Governing Law. The Plan and all rights and obligations under it shall
be construed and enforced in accordance with the laws of the State of
California.
19. Information to Optionees. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company's financial statements at least annually.
<PAGE>
EXHIBIT 10.28
BUSINESS LOAN AGREEMENT
This Business Loan Agreement (this "Agreement") is entered into as of the date
set forth below between Union Bank of California, N.A. ("Bank") and the
undersigned ("Borrower") with respect to each and every extension of credit
(whether one or more, collectively referred to as the "Loan") from Bank to
Borrower. In consideration of the Loan, Bank and Borrower agree to the following
terms and conditions:
1. THE LOAN.
1.1 The Note. The Loan is evidenced by one or more promissory notes or other
evidences of indebtedness, including each amendment, extension, renewal or
replacement thereof, which are incorporated herein by this reference (whether
one or more, collectively referred to as the "Note").
* Wherever "N/A" appears in a blank in this Agreement, it means the
Subsection in which it appears is deemed deleted from this Agreement.
1.2 Revolving Loan Clean-up Period. For any portion of the Loan which is a
revolving loan, at least 30 consecutive days during each 12 month period the
principal amount outstanding under such revolving loan must be zero.
1.3 Term Loan Availability Period. For any portion of the Loan which is a
term loan, loan proceeds shall be available for disbursement from October 15,
1996 through March 31,1997 only.
1.4 Fee. Borrower shall pay to bank a fee of $ 2,500.00.
1.5 Collateral. The payment and performance of all obligations of Borrower
under the Loan Documents is and shall be during the term of the Loan secured
by a perfected security interest in such real or personal property collateral
as is required by Bank and each security interest shall rank in first priority
unless otherwise specified in writing by Bank.
1.6 Guaranty. The payment and performance of all obligations of Borrower
under the Loan Documents are and shall be during the term of the Loan
guaranteed by: NA
1.7 Subordination. Certain other obligations of Borrower are and shall be
during the term of the Loan subordinated, to the repayment of the Loan and all
other obligations of Borrower to Bank, pursuant to one or more subordination
agreement(s) in favor of Bank executed and delivered by: NA
2. CONDITIONS TO AVAILABILITY OF THE LOAN. Before Bank is obligated to
disburse all or any portion of the Loan, Bank must have received (a) the Note
and every other document required by Bank in connection with the Loan, each of
which must be in form and substance satisfactory to Bank (together with this
Agreement, referred to as the "Loan Documents"), (b) confirmation of the
perfection of its security interest in any collateral for the Loan, and (c)
payment of any fee required in connection with the Loan.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each
request for a disbursement of the proceeds of the Loan shall be deemed a
representation and warranty made on the date of such request) that:
3.1 Borrower is an individual or Borrower is duly organized and existing
under the laws of the state of its organization and is duly qualified to
conduct business in each jurisdiction in which its business is conducted;
3.2 The execution, delivery and performance of the Loan Documents executed by
Borrower are within Borrower's power, have been duly authorized, are legal,
valid and binding obligations of Borrower, and are
<PAGE>
not in conflict with the terms of any charter, bylaw, or other organization
papers of Borrower or with any law, indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is bound or affected;
3.3 All financial statements and other financial information submitted by
Borrower to Bank are true and correct in all material respects, and there has
been no material adverse change in Borrower's financial condition since the
date of the latest of such financial statements;
3.4 Borrower is properly licensed and in good standing in each state in
which Borrower is doing business, and Borrower has complied with all laws and
regulations affecting Borrower, including without limitation, each applicable
fictitious business name statute;
3.5 There is no event which is, or with notice or lapse of time or both would
be, an Event of Default (as defined in Article 5);
3.6 Borrower is not engaged in the business of extending credit for the
purpose of, and no part of the Loan will be used, directly or indirectly, for
purchasing or carrying margin stock within the meaning of Federal Reserve
Board Regulation U; and
3.7 Borrower is not aware of any fact, occurrence or circumstance which
Borrower has not disclosed to Bank in writing which has, or could reasonably
be expected to have, a material adverse effect on Borrower's ability to repay
the Loan or perform its obligations under the Loan Documents.
4. COVENANTS. Borrower agrees, so long as the Loan or any commitment to make
any advance under the Loan is outstanding and until full and final payment of
all sums outstanding under any Loan Document, that Borrower will:
4.1 Maintain:
(a) Working Capital equal to at least $ NA As used herein, "Working
Capital" means the excess of current assets over current liabilities);
(b) A ratio of current assets to current liabilities of at least 2.00:
1.00;
(c) A quick ratio of cash, accounts receivable and marketable securities
to current liabilities of at least NA: 1.00;
(d) Tangible Net Worth of at least $ 6,500,000 (As used herein "Tangible
Net Worth" means net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
names, goodwill and other similar intangible assets, organizational
expenses, and monies due from affiliates including officers, shareholders
and directors);
(e) A ratio of total liabilities to Tangible Net Worth of not greater than
NA: 1.00 (As used herein "Tangible Net Worth" means net worth increased by
indebtedness of Borrower subordinated to Bank and decreased by patents,
licenses, trademarks, trade names, goodwill and other similar intangible
assets, organizational expenses, and monies due from affiliates including
officers, shareholders and directors);
(f) A profit after taxes of not less than $ NA, to be measured as of the
end of each fiscal of Borrower for the period immediately preceding the
date of measurement;
(g) A ratio of Cash Flow to Debt Service of 2.00: 1.00. Compliance with
this subsection to be measured as of the end of each fiscal year of
Borrower. (As used herein, "Debt Service" means that portion of long-term
liabilities and capital leases coming due within 12 months of the date of
calculation, and "Cash Flow" means net profit after taxes, to which
depreciation, amortization and other non-cash expenses are added for the
12 month period immediately preceding the date of calculation); and
<PAGE>
(h) All accounting terms used in this Agreement shall have the definitions
given them by generally accepted accounting principles, unless otherwise
defined herein.
4.2 Give written notice to Bank within 15 days of the following:
(a) Any litigation or arbitration proceeding affecting Borrower where the
amount in controversy is $ 100,000 or more;
(b) Any material dispute which may exist between Borrower and any
government regulatory body or law enforcement body;
(c) Any Event of Default or any event which, upon notice, or lapse of
time, or both, would become an Event of Default;
(d) Any other matter which has resulted or is likely to result in a
material adverse change in Borrower's financial condition or operation;
and
(e) Any change in Borrower's name or the location of Borrower's principal
place of business, or the location of any collateral for the Loan, or the
establishment of any new place of business or the discontinuance of any
existing place of business.
4.3 Furnish to Bank an income statement, balance sheet, and statement of
retained earnings, with supportive schedules ("Financial Statement"), and any
other financial information requested by Bank, prepared in accordance with
generally accepted accounting principles and in a form satisfactory to Bank as
follows:
(a) Within 60 days after the close of each Quarter except for the final
quarter of each fiscal year, Borrower's Form 10Q as of the close of such
period.
(b) Within 120 days after the close of each fiscal year, a copy of
Borrower's annual Financial Statement prepared by a Certified Public
Account on an Audited basis. Any independent certified public accountant
who prepares Borrower's Financial Statement shall be selected by Borrower
and reasonably satisfactory to Bank;
(c) Within NA days after the close of each fiscal year, a copy of each
guarantor's annual Financial Statement;
(d) If any portion of the Loan is a Borrowing Base Loan, within NA days
after each calendar month end, a copy of Borrower's monthly accounts
receivable and accounts payable agings, and a certification of compliance
with the borrowing base in the Borrowing Base Addendum attached hereto,
executed by Borrower, which certificate shall accurately report Borrower's
Accounts, Eligible Accounts, Inventory, and Eligible Inventory; and
(e) Promptly upon request, any other financial information requested by
Bank.
4.4 Furnish to Bank, on Bank's request, a copy of Borrower's and each
guarantor's most recently filed federal income tax return with all
accompanying schedules.
4.5 Pay or reimburse Bank for all costs, expenses and fees incurred by Bank
in preparing and documenting this Agreement and the Loan, and all amendments
and modifications thereof, including but not limited to all filing and
recording fees, costs of appraisals, insurance and attorney's fees, including
the reasonable estimate of the allocated costs and expenses of in-house legal
counsel and staff.
<PAGE>
4.6 Maintain and preserve Borrower's existence, present form of business and
all rights, privileges and franchises necessary or desirable in the normal
course of its business, and keep all of Borrower's properties in good working
order and condition.
4.7 Maintain and keep in force insurance with companies acceptable to Bank
and in such amounts and types, including without limitation fire and public
liability insurance, as is usual in the business carried on by Borrower, or as
Bank may reasonably request. Such insurance policies must be in form and
substance satisfactory to Bank.
4.8 Maintain adequate books, accounts and records and prepare all financial
statements required hereunder in accordance with generally accepted accounting
principles, and in compliance with the regulations of any governmental
regulatory body having jurisdiction over Borrower or Borrower's business and
permit employees or agents of Bank at any reasonable time to inspect
Borrower's assets and properties, and to examine or audit Borrower's books,
accounts and records and make copies and memoranda thereof.
4.9 At all times comply with, or cause to be complied with, all laws,
statutes, rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Borrower's business, and all
material agreements to which Borrower is a party.
4.10 Except as provided in this Agreement, or in the ordinary course of its
business as currently conducted, not make any loans or advances, become a
guarantor or surety, pledge its credit or properties in any manner, or extend
credit.
4.11 Not purchase the debt or equity of another person or entity except for
savings accounts and certificates of deposit of Bank, direct U.S. Government
obligations and commercial paper issued by corporations with top ratings of
Moody's or Standard & Poor's, provided that all such permitted investments
shall mature within one year of purchase.
4.12 Not create, assume or suffer to exist any mortgage, encumbrance,
security interest, pledge or lien ("Lien") on Borrower's real or personal
property, whether nor owned or hereafter acquired, or upon the income or
profits thereof except the following: (a) Liens in favor of Bank, (b) Liens
for taxes or other items not delinquent or contested in good faith, or (c )
other Liens which do not exceed in the aggregate $50,000 at any one time.
4.13 Not sell or discount any account receivable or evidence of indebtedness,
except to Bank; not borrow any money or become contingently liable for money
borrowed, except pursuant to agreements made with Bank.
4.14 Neither liquidate, dissolve, enter into any consolidation, merger,
partnership, or other combination; nor convey, sell or lease all or the
greater part of its assets or business; nor purchase or lease all or the
greater part of the assets or business of another.
4.15 Not engage in any business activities or operations substantially
different from or unrelated to present business activities and operations.
4.16 Not, in any single fiscal year of Borrower, expend or incur obligations
of more than $200,000.
4.17 Not, in any single fiscal year of Borrower, enter into any lease of real
or personal property which would cause Borrower's aggregate annual obligations
under all such real and personal property leases to exceed $NA.
4.18 Borrower will promptly, upon demand by Bank, take such further action
and execute all such additional documents and instruments in connection with
this Agreement as Bank in its reasonable discretion deems necessary, and
promptly supply Bank with such other information concerning its affairs as
Bank may request from time to time.
<PAGE>
5. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events
of Default") shall terminate any obligation on the part of Bank to make or
continue the Loan and automatically, unless otherwise provided under the Loan
Documents, shall make all sums of interest and principal and any other amounts
owing under the Loan immediately due and payable, without notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor,
or any other notices or demands:
5.1 Borrower shall default in the due and punctual payment of the principal
of or the interest on the Note or any of the Loan Documents;
5.2 Any default shall occur under the Note;
5.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Documents;
5.4 Any guaranty or subordination agreement required hereunder is breached
or becomes ineffective, or any guarantor or subordinating creditor dies or
disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
5.5 There is a change in ownership or control of 10% or more of the issued
and outstanding stock of Borrower or any guarantor, or (if the Borrower is a
partnership) there is a change in ownership or control of any general
partner's interest.
6. MISCELLANEOUS.
6.1 The rights, powers and remedies given to Bank hereunder shall be
cumulative and not alternative and shall be in addition to all rights, powers,
and remedies given to Bank by law against Borrower or any other person,
including but not limited to Bank's rights of setoff or banker's lien.
6.2 Any forbearance or failure or delay by Bank in exercising any right,
power or remedy hereunder shall not be deemed a waiver thereof and any single
or partial exercise of any right, power or remedy shall not preclude the
further exercise thereof. No waiver shall be effective unless it is in
writing and signed by an officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and assigns
of Bank and the permitted successors and assignees of Borrower, and any
assignment by Borrower without Bank's consent shall be null and void.
6.4 This Agreement and all other agreements and instruments required by Bank
in connection herewith shall be governed by and construed according to the
laws of the State of California.
6.5 Should any one or more provisions of this Agreement be determined to be
illegal or unenforceable, all other provisions nevertheless shall be
effective. In the event of any conflict between the provisions of this
Agreement and the provisions of any note or reimbursement agreement evidencing
any indebtedness hereunder, the provisions of such note or reimbursement
agreement shall prevail.
6.6 Except for documents and instruments specifically referenced herein,
this Agreement constitutes the entire agreement between Bank and Borrower
regarding the Loan and all prior communications, verbal or written, between
Borrower and Bank shall be of no further effect or evidentiary value.
6.7 The section and subsection headings herein are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
6.8 This Agreement may be amended only in writing signed by all parties
hereto.
<PAGE>
6.9 Borrower and Bank may execute one or more counterparts to this
Agreement, each of which shall be deemed an original, but taken together shall
be one and the same instrument.
6.10 Any notices or other communications provided for or allowed hereunder
shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures at
the end of this Agreement and shall be considered to have been validly given:
(a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the next
business day if sent by overnight courier service of recognized standing; and
(d) upon telephoned confirmation of receipt, if telecopied.
7. ADDITIONAL PROVISIONS. The following additional provision, if any, are
hereby made part of this Agreement:
7.1 Advances drawn under the Revolving Loan shall be in amounts of not less
than $10,000.00 each.
7.2 Advances drawn under the Term Loan shall be in amounts of not less than
$50,000.00 each.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of.
Union Bank of California, N.A. ("Bank")
By: /S/ Jim Heim
Title: Vice President
Printed Name: Jim Heim
By: /S/ Kim Ha
Title: Vice President
Printed Name: Jim Heim
Address where notices to Bank are to be sent:
500 S. Main Street, Suite 200
Orange, CA 92868
Fax 714-565-5725
("Borrower")
Research Engineers, Inc
By: /S/ Brian Paul
Title: Chief Financial Officer
Printed Name: Brian Paul
Address where notices to Bank are to be sent:
22700 Savi Ranch Parkway
Yorba Linda, CA 92887
Fax 714-974-4771
<PAGE>
EXHIBIT 10.29
SECURITY AGREEMENT
THIS AGREEMENT EXECUTED AT YORBA LINDA, OCTOBER 3, 1996 BY RESEARCH ENGINEERS,
INC.
(HEREIN CALLED "DEBTOR").
AS SECURITY FOR THE PAYMENT AND PERFORMANCE OF ALL OF DEBTOR'S OBLIGATIONS TO
UNION BANK OF CALIFORNIA. N.A.. (HEREIN CALLED "BANK"), IRRESPECTIVE OF THE
MANNER IN WHICH OR THE TIME AT WHICH SUCH OBLIGATIONS AROSE OR SHALL ARISE, AND
WHETHER DIRECT OR INDIRECT, ALONE OR WITH OTHERS, ABSOLUTE OR CONTINGENT. DEBTOR
DOES HEREBY GRANT A CONTINUING SECURITY INTEREST TO BANK IN ALL PERSONAL
PROPERTY (HEREIN CALLED "COLLATERAL"), WHETHER NOW OR HEREAFTER OWNED OR IN
EXISTENCE DESCRIBED AS
A. MOTOR VEHICLES:
B. OTHER:
ALL ACOUNTS, DEPOSIT ACCOUNTS, INSTRUMENTS, CHATTEL PAPER, DOCUMENTS, GENERAL
INTANGIBLES, INVENTORY, EQUIPMENT, FURHITURE, AND FIXTURES, NOU OR HEREAFTER
OWNED OR ACPUIRED BY DEBTOR, ALL PROCEEDS AND INSURANCE PROCEEDS OF THE
FORECOING, ALL GUARANTEES AND OTHER SECURITIES THEREFOR, AND ALL OF DEBTOR'S
PRESENT AND FUTURE BOOKS AND RECORDS RELATING THERETO (INCLUDING COMPUTER-
STORED INFORMATION AND ALL SOFTWARE RELATING THERETO) AND ALL CONTRACT RIGHTS
WITH THIRD PARTIES RELATING TO THE MAINTENANCE OF ANY SUCH BOOKS, RECORDS AND
INFORMATION.
THE COLLATERAL DESCRIBED ABOVE WILL BE MAINTAINED AT 22700 SAVI RANCH PARKWAY
YORBA LINDA. CA 92687*
* and any other locations
C. ALL PERSONAL PROPERTY OF ANY KIND WHICH IS DELIVERED TO OR IN THE POSSESSION
OR CONTROL OF BANK OR ITS AGENTS;
D. PROCEEDS OF ANY OF THE ABOVE-DESCRIBED PROPERTY. THE GRANT OF A SECURITY
INTEREST IN PROCEEDS DOES NOT IMPLY THE RIGHT OF DEBTOR TO SELL OR DISPOSE OF
ANY COLLATERAL DESCRIBED HEREIN WITHOUT THE EXPRESS CONSENT IN WRITING BY
BANK. THE MAXIMUM AMOUNT OF INDEBTEDNESS TO BE SECURED AT ANY ONE TIME IS
UNLIMITED UNLESS AN AMOUNT IS INSERTED N/A (TO BE COMPLETED ONLY IF AN
ACCOMMODATION) N/A IS EXECUTING THIS AGREEMENT AS AN ACCOMMODATION DEBTOR
ONLY AND HIS LIABILITY IS LIMITED TO THE SECURITY INTEREST CREATED IN
COLLATERAL DESCRIBED HEREIN. THE DEBTOR BEING ACCOMMODATED IS N/A
ALL TERMS AND CONDITIONS ON THE REVERSE SIDE HEREOF ARE INCORPORATED HEREIN AS
THOUGH SET FORTH IN FULL.
RESEARCH ENDINEERS, INC.
BY: /S/ BRIAN PAUL TITLE: CFO
AGREEMENT
1. The term credit is used throughout this Agreement in its broadest and most
comprehensive sense. Credit may be granted at the request of any one Debtor
without further authorization or notice to any other Debtor, including an
Accommodation Debtor. Collateral shall be security for all obligations of
Debtor to Bank in accordance with the terms and conditions herein.
2. Debtor will: (a) execute such Financing Statement and other documents and do
such other acts and things, all as Bank may from time to time require, to
establish and maintain a valid security interest in Collateral, including
payment of all costs and fees in connection with any of the foregoing when
deemed necessary by
<PAGE>
Bank; (b) pay promptly when due all indebtedness to Bank; (c) furnish Bank
such information concerning Debtor and Collateral as Bank may from time to
time request, including but not limited to current financial statements; (d)
keep Collateral separate and identifiable and at the location described
herein and permit Bank and its representatives to inspect Collateral and/or
records pertaining thereto from time to time during normal business hours;
(e) not sell. assign or create or permit to exist any lien on or security
interest in Collateral in favor of anyone other than the Bank unless Bank
consents thereto in writing and at Debtor's expense upon Bank's request
remove any unauthorized lien or security interest and defend any claim
affecting the Collateral; (f) pay all charges against Collateral prior to
delinquency including but not limited to taxes, assessments, encumbrances,
insurance and diverse claims, and upon Debtor's failure to do so Bank may pay
any such charge as it deems necessary and add the amount paid to the
indebtedness of Debtor hereunder; (g) reimburse Bank for any expenses
including but not limited to reasonable attorneys' fees and legal expenses
incurred by Bank in seeking to protect, collect or enforce any rights in
Collateral; (h) when required, provide insurance in form and amounts and with
companies acceptable to Bank and when required assign the policies or the
rights thereunder to Bank: (i) maintain Collateral in good condition and not
use Collateral for any unlawful purpose; (j) at its own expense, upon request
of Bank, notify any parties obligated to Debtor on any Collateral to make
payment to Bank and Debtor hereby irrevocably grants Bank power of attorney
to make said notifications and collections; (k) and does hereby authorize
Bank to perform any and all acts which Bank in good faith deems necessary for
the protection and preservation of Collateral or its value or Bank's security
interest therein, including transferring any Collateral into its own name and
receiving the income thereon as additional security hereunder. Bank may not
exercise any right under any corporate security, which might constitute the
exercise of control by Bank so as to make any such corporation an affiliate
of Bank within the meaning of the banking laws until after default.
3. The term default shall mean the occurrence of any of the following events:
(a) non-payment of any indebtedness when due or non-performance of any
obligation when due, whether required hereunder or otherwise; (b)
deterioration or impairment of the value of Collateral; (c) non-performance
by Debtor under this Agreement, default by Debtor of any other agreements
with Bank dealing with the extension of credit or with debt owing Bank or any
misrepresentation of Debtor or its representative to Bank whether or not
contained herein; (d) a change in the composition of any Debtor which is a
business entity; or (e) belief by Bank in good faith that there exists, or
the actual existence of, any deterioration or impairment in the ability of
Debtor to meet its obligations to Bank.
4. Whenever a default exists, Bank, at its option may: (a) without notice
accelerate the maturity of any part or all of the secured obligations end
terminate any agreement for the granting of further credit to Debtor; (b)
sell, lease or otherwise dispose of Collateral at public or private sale;
unless Collateral is perishable and threatens to decline speedily in value or
is a type customarily sold on a recognized market, Bank will give Debtor at
least five (5) days prior written notice of the time and place of any public
sale or of the time after which any private sale or any other intended
disposition may be made; (c) transfer any Collateral into its own name or
that of its nominee; (d) retain Collateral in satisfaction of obligations
secured hereby, with notice of such retention sent to Debtor as required by
law; (e) notify any parties obligated on any Collateral consisting of
accounts, instruments, chattel paper, chooses in action or the like to make
payment to Bank and enforce collection of any Collateral herein; (f) require
Debtor to assemble and deliver any Collateral to Bank at a reasonable
convenient place designated by Bank; (g) apply all sums received or collected
from or on account of Collateral including the proceeds of any sales thereof
to the payment of the costs and expenses incurred in preserving and enforcing
rights of Bank including but not limited to reasonable attorneys' fees, and
indebtedness secured hereby in such order and manner as Bank in its sole
discretion determines; Bank shall account to Debtor for any surplus remaining
thereafter, and shall pay such surplus to the party entitled thereto,
including any second secured party who has made a proper demand upon Bank and
has furnished proof to Bank as requested in the manner provided by law; in
like manner, Debtor, unless an Accommodation Debtor only, agrees to pay to
Bank without demand any deficiency after any Collateral has been disposed of
and proceeds applied as aforesaid; and (h) exercise its banker's lien or
right of setoff in the same manner as though the credit were unsecured. Bank
shall have all the rights and remedies of a secured party under the Uniform
Commercial Code of California in any jurisdiction where enforcement is
sought, whether in California or elsewhere. All rights, powers and remedies
of Bank hereunder shall be cumulative and not alternative. No delay on the
part of Bank in the exercise of any right or remedy shall constitute a waiver
thereof and no exercise by Bank of any right or remedy shall preclude the
exercise of any other right or remedy or further exercise of the same remedy.
<PAGE>
5. Debtor waives: (a) all right to require Bank to proceed against any other
person including any other Debtor hereunder or to apply any Collateral Bank
may hold at any time or to pursue any other remedy; Collateral, endorsers or
guarantors may be released, substituted or added without affecting the
liability of Debtor hereunder (b) the defense of the Statute of Limitations
in any action upon any obligations of Debtor secured hereby; (C) if he is an
Accommodation Debtor, all rights under Uniform Commercial Code Section 9112;
and (d) any right of subrogation and any right to participate in Collateral
until all obligations hereby secured have been paid in full.
6. Debtor warrants: (a) that it is or will be the lawful owner of all
Collateral free of all claims, liens or encumbrances whatsoever, other than
the security interest granted pursuant hereto; (b) all information,
including but not limited to financial statements furnished by Debtor to
Bank heretofore or hereafter, whether oral or written, is and will be
correct and true as of the date given; and (c) if Debtor is a business
entity, the execution, delivery and performance hereof are within its powers
and have been duly authorized.
7. The right of Bank to have recourse against Collateral shall not be affected
in any way by the fact that the credit is secured by a mortgage, deed of
trust or other lien upon real property.
8. Debtor may terminate this Agreement at any time upon written notice to Bank
of such termination; provided however, that such termination shall not
affect his obligations then outstanding, any extensions or renewals thereof,
nor the security interest granted herein which shall continue until such
outstanding obligations are satisfied in full. Such termination shall not
affect the obligations of other Debtors if more than one executes this
Agreement.
9. If more than one Debtor executes this Agreement. the obligations hereunder
are joint and several. All words used herein in the singular shall be deemed
to have been used in the plural when the context and construction so
require. Any married persons who sign this Agreement expressly agree that
recourse may be had against his/her separate property for all of his/her
obligations to Bank.
10. This Agreement shall inure to the benefit of and bind Bank, its successors
and assigns and each of the undersigned, their respective heirs, executors,
administrators and successors in interest. Upon transfer by Bank of any part
of the obligations secured hereby. Bank shall be fully discharged from all
liability with respect to Collateral transferred therewith.
11. Whenever possible each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law, but, if any
provision of this Agreement shall be prohibited or invalid under applicable
law, such provisions shall be ineffective to the extent of such prohibition
or invalidity without invalidating the remainder of such or the remaining
provisions of this Agreement.
<PAGE>
EXHIBIT 10.30
PROMISSORY NOTE
(BASE RATE)
BORROWER NAME: RESEARCH ENGINEERS, INC
BORROWERS ADDRESS
22700 SAVI RANCH PARKWAY
YORBA LINDA, CA 92887
ORANGE, CALIFORNIA $500.000.00 DATE: SEPTEMBER 2, 1996
FOR VALUE RECEIVED, ON APRIL 1, 2000, THE UNDERSIGNED ("DEBTOR") PROMISES TO PAY
TO THE ORDER OF UNION BANK OF CALIFORNIA, N.A. ("BANK"), AS INDICATED BELOW, THE
PRINCIPAL SUM OF FIVE HUNDRED THOUSAND AND N0/100 DOLLARS ($500.000.00), OR SO
MUCH THEREOF AS IS DISBURSED, TOGETHER WITH INTEREST ON THE BALANCE OF SUCH
PRINCIPAL FROM TIME TO TIME OUTSTANDING, AT THE PER ANNUM RATES AND AT THE TIMES
SET FORTH BELOW.
1. PAYMENTS.
PRINCIPAL PAYMENTS. Principal shall be payable in 36 equal consecutive
monthly installments, each installment in an amount sufficient to fully
amortize the principal balance by the final maturity date, beginning MAY 1,
1997 and continuing on the 1ST day of each consecutive month.
INTEREST PAYMENTS. Debtor shall pay interest on the 1ST day of each MONTH
(commencing DECEMBER 1, 1996). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year
of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in
increments of at least $10.000 shall bear interest at a rate to be
selected by Debtor which is 2.25% per annum in excess of Bank's Adjusted
LIBOR-Rate for the Interest Period so selected by Debtor.
Any Base Interest Rate selected by Debtor may not be changed, altered or
otherwise modified until the expiration of the Interest Period for which
it was selected. The exercise of interest options by Debtor shall be as
recorded in Bank's records, which records shall be prima facie evidence of
the amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in its
records shall not discharge Debtor from its obligations to repay in full
with interest all amounts borrowed. In no event shall any Interest Period
extend beyond the maturity date of this note.
To select a Base Interest Rate, Debtor may, from time to time with respect
to principal outstanding on which a Base Interest Rate has not been
selected and on the expiration of any Interest Period with respect to
principal outstanding on which a Base Interest Rate has been selected,
select a Base Interest Rate by telephoning an authorized lending officer
of Bank located at the banking office identified below prior to 10:00
a.m., California time on any Business Day and advising that officer of the
Base Interest Rate, the Interest Period and the Origination Date selected
(which Origination Date, for a Base Interest Rate Loan based on the
Adjusted LIBOR-Rate, shall follow the date of such election by no more
than two (2) Business Days).
Bank will confirm the terms of the election in writing by mail to Debtor
promptly after the election is made. Failure to send such confirmation
shall not affect Bank's rights to collect interest at the rate selected.
If on the date of the election, the Base Interest Rate selected is
unavailable for any reason, the selection shall be void. Bank reserves the
right to fund the principal from any source of funds notwithstanding any
Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not
bearing interest at a Base Interest Rate shall bear interest at a rate per
annum of .50% in excess of the Reference Rate, which rate shall vary as
and when the Reference Rate changes. Debtor shall pay all amounts due
under this
<PAGE>
note in lawful money of the United States a Bank's ORANGE COVNTY COMMERCIAL
BANKING Office, or such other office as may be designated by Bank, from
time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of the Bank. Debtor
shall pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in paragraph l.b,
above, of this note, calculated from the date of default until all amounts
payable under this note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on the
Reference Rate may be prepaid in whole or in part at any time, without
penalty or premium. Amounts outstanding at a Base Interest Rate under this
note may only be prepaid, in whole or in part provided Bank has received
not less than five (5) Business Days prior written notice of an intention
to make such prepayment and Debtor pays a prepayment fee to Bank in an
amount equal to: (i) the difference between (a) the Base Interest Rate
applicable to the principal amount which Debtor intends to prepay, and (b)
the return which Bank could obtain if it used the amount of such prepayment
of principal to purchase at bid price regularly quoted securities issued by
the United States having a maturity date most closely coinciding with the
relevant Base Rate Maturity Date and such securities were held by Bank
until the relevant Base Rate Maturity Date ("Yield Rate"); (ii) the above
difference. if greater than zero. is multiplied by a fraction. the
numerator of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator of
which is 360 days; (iii) the above product is multiplied by the amount of
the principal so prepaid (except in the event that principal payments are
required and have been made as scheduled under the terms of the Base
Interest Rate Loan being prepaid. then the amount multiplied in this
section shall be the lesser of the amount prepaid or 50% of the total of
the amount prepaid and the amount of principal scheduled under the terms of
the Base Interest Rate Loan being prepaid to be outstanding at the relevant
Base Rate Maturity Date): and (iv) the above product is then discounted to
present value using the Yield Rate as the annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim against
Bank, should the return which Bank could obtain under the above prepayment
formula, exceed the interest that Bank would have received if no prepayment
had occurred. All prepayments shall include payment of accrued interest on
the principal amount so prepaid and shall be applied to payment of interest
before application to principal. A determination by Bank as to the
prepayment fee amount, if any, shall be conclusive. In the event of partial
prepayment, such prepayments shall be applied to principal payments in the
inverse order of their maturity.
c. Such prepayment fee, if any, shall also be payable if prepayment occurs as
the result of the acceleration of the principal of this note by Bank
because of any default hereunder. If, following such acceleration, all or
any portion of a Base Interest Rate Loan is satisfied, whether through sale
of property encumbered by a security agreement or of her agreement securing
this note, if any, at a foreclosure sale held thereunder or through the
tender of payment any time following such acceleration. but prior to such a
foreclosure sale, then such satisfaction shall be deemed an evasion of the
prepayment conditions set forth above, and Bank shall, automatically and
without notice or demand. be entitled to receive, concurrently with such
satisfaction the prepayment fee set forth above, and the obligation to pay
Each prepayment fee shall be added to the principal. DEBTOR HEREBY
ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT LEND TO DEBTOR THE LOAN
EVIDENCED BY THIS NOTE WITHOUT DEBTOR'S AGREEMENT. AS SET FORTH ABOVE. TO
PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY PORTION OF
THE PRINCIPAL BEARING INTEREST AT A BASE INTEREST RATE FOLLOWING THE
ACCELERATION OF THE MATURITY DATE HEREOF BY REASON OF A DEFAULT. DEBTOR HAS
CAUSED THOSE
<PAGE>
PERSONS SIGNING THIS NOTE ON ITS BEHALF TO SEPARATELY INITIAL THE AGREEMENT
CONTAINED IN THIS PARAGRAPH BY PLACING THEIR INITIALS BELOW:
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include. but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breech, misrepresentation
or other default by Debtor, any guarantor, co-maker, endorser, or any person
or entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any
security agreement. guaranty or other agreement between Bank and any Obligor;
(c) the insolvency of any Obligor or the failure of any Obligor generally to
pay such Obligor's debts as such debts become due; (d) the commencement as to
any Obligor of any voluntary or involuntary proceeding under any laws
relating to bankruptcy, insolvency, reorganization, arrangement, debt
adjustment or debtor relief; (e) the assignment by any Obligor for the
benefit of such Obligor's creditors; (f) the appointment, or commencement of
any proceeding for the appointment of a receiver, trustee, custodian or
similar official for all or substantially all of any Obligor's property; (g)
the commencement of any proceeding for the dissolution or liquidation of any
Obligor; (h) the termination of existence or death of any Obligor; (i) the
revocation of any guaranty or subordination agreement Given in connection
with this note; (j) the failure of any Obligor to comply with any order,
judgement, injunction, decree, writ or demand of any court or other public
authority; (k) the filing or recording against any Obligor. or the property
of any Obligor of any notice of levy, notice to withhold, or other legal
process for taxes other than property taxes; (l) the default by any Obligor
personally liable for amounts owed hereunder on any obligation concerning the
borrowing of money; (m) the issuance against any Obligor. or the property of
any Obligor, of any writ of enactment, execution, or other judicial lien; or
(n) the deterioration of the financial condition of any Obligor which results
in Bank deeming itself, in good faith, insecure. Upon the occurrence of any
such default, Bank, in its discretion, may cease to advance funds hereunder
and may declare all obligations under this note immediately due and payable;
however, upon the occurrence of an event of default under d, e, f, or g, all
principal and interest shall automatically become immediately due and
payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due. Debtor promises to pay all costs end expenses including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement
of this note. Debtor and any endorsers of this note, for the maximum period
of time and the full extent permitted by law, (a) waive diligence,
presentment, demand, notice of nonpayment, protest, notice of protest, and
notice of every kind; (b) waive the right to assert the defense of any
statute of limitations to any debt or obligation hereunder; and (c) consent
to renewals and extensions of time for the payment of any amounts due under
this note. If this note is signed by more than one party, the term "Debtor"
includes each of the undersigned and any successors in interest thereof; all
of whose liability shall be joint end several. Any married person who signs
this note agrees that recourse may be had against the separate property of
that person for any obligations hereunder. The receipt of any check or other
item of payment by Bank, at its option, shall not be considered a payment on
account until such check or other item of payment is honored when presented
for payment at the drawee bank. Bank may delay the credit of such payment
based upon Bank's schedule of funds availability, and interest under this
note shall accrue until the funds are deemed collected. In any action brought
under or arising out of this note. Debtor and any Obligor, including their
successors or assigns, hereby consent to the jurisdiction of any competent
court within the State of California, as provided in any alternative dispute
resolution agreement executed between Debtor and Bank, and consent to service
of process by any means authorized by California law. The term "Bank"
includes, without limitation, any holder of this note. This note shall be
construed in accordance with and governed by the laws of the State of
California. This note hereby incorporates any alternative dispute resolution
agreement previously, concurrently or hereafter executed between Debtor and
Bank.
7. DEFINITIONS. As used herein, the following terms shell have the meanings
respectively set forth below: "Adjusted LIBOR-Rate" shall mean the LIBOR Base
Rate as adjusted for reserve requirements imposed on Bank from time to time.
"Base Interest Rate" shall mean a rate of interest based on the Adjusted
LIBOR-Rate. "Base Interest Rate Loan" shall mean amounts outstanding under
this note that bear interest at a Base Interest Rate. "Base Rate Maturity
Date" shall mean the last day of the Interest Period with respect to
principal outstanding on which a Base Interest Rate has been selected by
Debtor. "Business Day" shall mean a day which is not a Saturday or Sunday on
which Bank is open for business in California and on which
<PAGE>
dealings in U.S. dollar deposits outside of the United States may be carried
on by Bank. "Interest Period" shall mean any calendar period of one, three,
six, nine or twelve months. In determining an Interest Period, a month means
a period that starts on one Business Day in a month and ends on and includes
the day preceding the numerically corresponding day in the next month. For
any month in which there is no such numerically corresponding day, then as to
that month, such day shall be deemed to be the last calendar day of such
month. Any Interest Period which would otherwise end on a non-Business Day
shall end on the next succeeding Business Day unless that is the first day of
a month, in which event such Interest Period shall end on the next preceding
Business Day. "LIBOR Base Rate" shall mean for each Interest Period the rate
per annum (rounded upward, if necessary to the nearest 1/100 of 1%) at which
dollar deposits, in immediately available funds and in lawful money of the
United States would be offered to Bank, outside of the United States, for a
term coinciding with such Interest Period and for an amount equal to the
amount of principal covered by Debtor's interest rate election. "Origination
Date" shall mean the Business Day on which funds are made available to Debtor
relating to Debtor's selection of a Base Interest Rate. "Reference Rate"
shall mean the rate announced by Bank from time to time at its corporate
headquarters at its "Reference Rate." The Reference Rate is an index rate
determined by Bank from time to time as a means of pricing certain extensions
of credit and is neither directly tied to any external rate of interest or
index not necessarily the-lowest rate of interest charged by Bank at any
given time.
RESEARCH ENGINEERS, INC.
By: /S/ Brian Paul
Title: CFO
<PAGE>
EXHIBIT 10.31
VARIABLE RATE PROMISSORY NOTE
Secured by Deed of Trust
IRVINE, California Date: March 20, 1997
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the order of
UNION BANK OF CALIFORNIA, N.A. ("Bank") the principal sum of One Million Eight
Hundred Thousand Dollars ($1.800.000.00), or so much thereof as is advanced
under this Promissory Note ("Note"), together with interest on the balance of
such principal sum from time to time outstanding. at a per annum rate (the "Note
Rate") established from time to time as provided below.
This Note evidences a loan (the "Loan") from Bank to Borrower made pursuant to a
Loan Agreement (the "Loan Agreement") between Bank and Borrower of even date
herewith. This Note is secured by a Deed of Trust, Assignment of Rents. Security
Agreement and Fixture Filing (the "Deed of Trust") covering certain real
property and other collateral as described therein.
1. PAYMENTS
(a) Interest for the period commencing on the date funds are advanced hereunder
and ending on the last day of the month in which said funds are advanced shall
be paid in advance by deducting the amount due from the funds disbursed at
closing. Such interest for such period shall be calculated on the full amount
advanced under this Note.
(b) Borrower shall pay to Bank equal monthly installments of principal and
interest ("Regular Payments") in such an amount that will, in the aggregate,
repay principal and accrued interest at the Note Rate over a two hundred forty
(240) month amortization period (the "Amortization Period"). Initially, the
Regular Payments shall be fifteen thousand twenty two and 23/100 Dollars
($15.022.23) per month. The Regular Payments are subject to change if the Note
Rate changes as provided in Sections 2 and 3 below.
(c) Borrower shall make one hundred nineteen (119) monthly Regular Payments
commencing on May 1. 1997 and continuing on the first day of each month
thereafter, with a final payment of all remaining unpaid principal, accrued
interest and other sums due under this Note due and payable on April 1. 2007
(the "Maturity Date").
(d) The amount of each year's interest on the Note will, as it accrues, be
calculated on the basis of a 360-day year, comprised of twelve 30-day months.
The Regular Payments will be applied first to accrued but unpaid interest then
due, and then to principal. The early or late date of making a Regular Payment
will be disregarded for purposes of allocating the payment between principal and
interest. For this purpose, the payment will be treated as though made on the
date due. The receipt of any check or other item of payment by Bank, at its
option, shall not be considered a payment on account until such check or other
item of payment is honored when presented for payment at the drawee bank. Bank
may delay the credit of such payment based upon Bank's schedule of funds
availability.
(e) Borrower shall pay all amounts due under this Note in lawful money of the
United States to Union Bank of California, N.A., 18300 Von Karman Avenue Suite
200, Irvine, California 92612, or such other office as may be designated by Bank
from time to time.
2. VARIABLE INTEREST RATE AND PAYMENT TERMS
(a) Interest Rate. As long as Borrower has not exercised the Fixed Rate
Conversion Option described in Paragraph 3 below, interest on unpaid principal
shall accrue at an initial Note Rate, from the date of first disbursement of
Loan proceeds to the first Interest Change Date (as defined below), at a per
annum rate equal to seven and ninety seven one-hundredths percent(7.97%).
Thereafter, pursuant to this Section 2, interest shall accrue at a per annum
Note Rate equal to the Index Figure (as defined below) determined on each
Interest Change
<PAGE>
Date plus two and twenty five one-hundredths percent (2.25%) (the "Spread"). The
initial Note Rate and any subsequent Note Rate determined with reference to the
Index Figure is defined as the "Variable Note Rate".
(b) Defined Terms.
(i) "Index" shall mean the LIBOR Base Rate which is the rate per annum
(rounded upward, if necessary, to the nearest 1/100 of 1%) at which dollar
deposits. in immediately available funds and in lawful money of the United
States would be offered to Bank, outside of the United States for a three
(3) month term, adjusted for reserve requirements imposed on Bank from time
to time. If at any time the Index is no longer available, Bank, with notice
to Borrower, will choose a new index that in Bank's sole determination is
based on comparable information.
(ii) "Banking Day" shall mean a day, other than a Saturday or a Sunday, on
which Bank is open for business for all banking functions in California.
(iii) "Index Figure" shall mean the Index as of the Interest Change Date.
If the Interest Change Date falls on a date, which is not a Banking Day,
the first immediately preceding Banking Day shall be used for purposes of
determining the Index Figure.
(iv) "Interest Change Date" shall mean July 1, 1997, and the first day of
each month occurring at three (3) month intervals thereafter.
(v) "Interest Period" shall mean the period of time from one Interest
Change Date to the next or to the Maturity Date of this Note. as the case
may be.
(c) Changes in Interest Rate and Monthly Payments
(i) Changes in Interest Rate. The Variable Note Rate shall change on each
Interest Change Date based on changes in the Index. On each Interest Change
Date, Bank shall determine the Index Figure and set the Variable Note Rate
for the next Interest Period.
(ii) Changes in Regular Payment. On each Interest Change Date, the Regular
Payments will change to the amount necessary to amortize the unpaid
principal owing at the Interest Change Date over the remaining Amortization
Period at the new Variable Note Rate. For example, if the Amortization
Period is 240 months, and 12 whole calendar months have elapsed since the
disbursement of the Loan, the new remaining Amortization Period would be
228 months. Borrower will pay the amount of the new Regular Payment
beginning on the first monthly payment date after the Interest Change Date
and on each monthly payment date during the applicable Interest Period.
(iii) Notice of Changes. Bank will deliver to Borrower notice of any
changes in the Variable Note Rate or the Regular Payments, but the
effectiveness and date of such changes shall not be affected by such notice
or the lack thereof. There is no limit on the amount the Variable Note Rate
or the Regular Payments on this Note may increase or decrease on any single
Interest Change Date. or in the aggregate throughout the term of the Loan.
3. FIXED RATE CONVERSION OPTION
(a) Conversion option. Borrower shall have the one-time right and option (the
"Fixed Rate Conversion Option"). to convert the Variable Note Rate to a fixed
interest rate ("Fixed Note Rate"), which shall remain in effect until the
Maturity Date. The Fixed Note Rate shall be a per annum rate equal to the
Treasury Rate plus the Spread. "Treasury Rate" shall mean the interest rate
yield for US Government Treasury securities, as determined by Bank, having a
maturity date most nearly coinciding with the Maturity Date. Bank's
determination of such interest rate yield shall be based on information from the
Telerate or Reuters information services, the Western Edition of The Wall Street
Journal or other information sources Bank deems appropriate. Provided no Event
of Default then exists under the Loan Agreement or any other Loan Document (as
defined in the Loan Agreement), Borrower may exercise the Fixed Rate Conversion
Option by giving written notice to Bank of the exercise of such right, which
notice must be received by Bank on or before March 15, 2000. The Fixed Rate
Conversion Option shall become effective (the "Conversion Date") on the first
day of the calendar month following the date of exercise of the Fixed Rate
Conversion Option. Borrower's written notice of exercise of the Fixed Rate
Conversion Option shall be irrevocable.
<PAGE>
(b) Change in Regular Payments. On the Conversion Date, the Regular Payment
will change to the amount necessary to amortize the unpaid principal owing at
the Conversion Date over the remaining Amortization Period at the Fixed Note
Rate. For example, if the Amortization Period is 240 months, and 12 whole
calendar months have elapsed since the disbursement of the Loan, the new
remaining Amortization Period would be 228 months. Borrower will pay the amount
of the new Regular Payment beginning on the first monthly payment date after the
Conversion Date and on each monthly payment date thereafter.
(c) Notice of Changes. Bank will notify Borrower in writing of the Fixed Note
Rate established by Bank following the Conversion Date, and the Regular Payments
established for the remaining term of this Note, but the effectiveness and date
of such changes shall not be affected by such notice or the lack thereof.
4. LATE PAYMENTS. If Bank has not received the full amount of any Regular
Payment by the end of ten (10) calendar days after the date it is due, Borrower
will pay to Bank a late charge in the amount of six percent (6%) of the overdue
payment, such late charge to be immediately due and payable without notice or
demand by Bank. Borrower will pay this late charge only once on any late
payment. Borrower agrees that Bank will incur administrative costs and other
damages not compensated by payment of interest as a result of any Regular
Payment not being made when due and acknowledges that calculation of actual
damages is extremely difficult and impracticable and that the foregoing amount
is a reasonable estimate of these damages.
5. INTEREST RATE FOLLOWING DEFAULT. From and after the Maturity Date, or such
earlier date as all sums owing on this Note become due and payable by
acceleration or otherwise, all sums owing on this Note (including accrued and
unpaid interest), shall, at the option of Bank, bear interest from the date the
payment becomes due until Borrower pays in full, at five percent (5%) above the
Note Rate (the "Default Rate"). The fact that accrued interest, at the Note
Rate. if not paid when due, will accrue interest at the Default Rate. as
hereinabove provided. may result in compounding of interest.
6. PREPAYMENT
(a) Voluntary Prepayment and Fee. This Note may be voluntarily prepaid in whole
only, provided Bank has received not less than five (5) business day's prior
written notice of Borrower's intention to make such prepayment. Except as
otherwise provided below. any prepayment of principal prior to the scheduled
payment date under this Note, whether voluntary or involuntary, shall be
accompanied by Borrower's payment of a prepayment fee to Bank determined as
follows:
(i) if such prepayment occurs during the first year of the Loan term, such
prepayment fee shall equal one percent (1%) of the principal prepaid;
(ii) if such prepayment occurs following the first year of the loan term
and prior to exercise of the Fixed Rate Conversion Option. no prepayment
fee shall be due; and
(iii) if such prepayment occurs following exercise of the Fixed Rate
Conversion Option, the prepayment fee shall be the greater of:
A. One percent (1%) of the principal prepaid; or
B. The amount calculated under the following formula:
Bank shall determine the difference between (i) the Fixed Note
Rate and (ii) the rate of return ("Yield Rate") which Bank could
obtain if it used the amount of such principal prepayment to
purchase, at the bid price regularly quoted, U.S. Government
Treasury securities having a maturity date most nearly coinciding
with the Maturity Date of this Note and such securities were held
by Bank until such Maturity Date.
The above difference, if greater than zero, shall be multiplied by a fraction,
the numerator of which is the number of days from the date of prepayment to the
Maturity Date, and the denominator of which is 360 days.
The above product shall then be multiplied by the amount of the
principal so prepaid.
<PAGE>
The above product shall then be discounted to present value using
the Yield Rate as the annual discount factor.
(iv) Notwithstanding subparagraph (iii) above. no prepayment fee shall be
payable in respect of principal prepaid during the ninety (90) day period
immediately preceding the Maturity Date.
(b) In no event shall Bank be obligated to make any payment or refund to
Borrower, nor shall Borrower be entitled to any setoff or other claim against
Bank, should the return which Bank could obtain under the prepayment formula
exceed the interest that Bank would have received if no prepayment had occurred.
(c) All prepayments shall include payment of accrued interest on the principal
amount so prepaid, shall be applied to payment of interest before application to
principal, and shall be applied to the most remote principal installment or
installments then unpaid (i.e.. the principal balance due on the Maturity Date
and then against installments due closest to the Maturity Date).
(d) Such prepayment fee shall also be payable if prepayment occurs as the
result of any involuntary prepayment (e.g., proceeds of insurance or
condemnation) or the acceleration of the principal hereof by Bank because of any
default by Borrower (including any transfer or conveyance of any right, title or
interest in the real property encumbered by the Deed of Trust) that gives Bank
the right to accelerate the maturity of this Note pursuant to the terms of the
Deed of Trust. If, following any such acceleration. all or any portion of the
unpaid principal is satisfied, whether through sale of the property encumbered
by the Deed of Trust or other agreement securing this Note at a foreclosure held
thereunder or through the tender of payment at any time following such
acceleration, but prior to such a foreclosure sale, then such satisfaction of
principal shall be deemed an evasion of the prepayment provisions hereof, and
Bank shall, automatically and without notice or demand. be entitled to receive,
concurrently with such satisfaction of principal the prepayment fee set forth
above, and the obligation to pay such prepayment fee shall be added to the
principal hereof.
BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT LEND TO BORROWER THE
LOAN EVIDENCED BY THIS NOTE WITHOUT BORROWER'S AGREEMENT TO PAY BANK A
PREPAYMENT FEE AS SET FORTH ABOVE. BORROWER EXPRESSLY WAIVES ANY RIGHT UNDER
CALIFORNIA CIVIL CODE SECTION 2954. 10 OR OTHERWISE TO PREPAY THE LOAN WITHOUT A
PREPAYMENT FEE AS HEREINABOVE SET FORTH. BORROWER ACKNOWLEDGES THAT PREPAYMENT
OF THE LOAN MAY RESULT IN BANK INCURRING ADDITIONAL COSTS, EXPENSES OR
LIABILITIES. BORROWER THEREFORE AGREES THAT THE PREPAYMENT FEE HEREIN PROVIDED
FOR REPRESENTS A REASONABLE ESTIMATE OF THE PREPAYMENT COSTS. EXPENSES OR
LIABILITIES BANK MAY INCUR ON A PREPAYMENT. BORROWER AGREES THAT BANK'S
WILLINGNESS TO OFFER THE FIXED INTEREST RATE DESCRIBED ABOVE TO BORROWER IS
SUFFICIENT AND INDEPENDENT CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY BANK, FOR
THIS WAIVER. BORROWER UNDERSTANDS THAT BANK WOULD NOT OFFER SUCH AN INTEREST
RATE TO BORROWER ABSENT THIS WAIVER. BORROWER HAS CAUSED THOSE PERSONS SIGNING
THIS NOTE ON ITS BEHALF TO SEPARATELY INITIAL SEPARATELY INITIALS THIS PARAGRAPH
BY PLACING THEIR INITIALS BELOW:
INITIALS: /S/ BP
(e) Certificate. A certificate as to the amount of any prepayment fee payable
under this Paragraph, setting forth the basis for such fee, prepared by Bank and
submitted to Borrower shall be conclusive as to the matters set forth in this
Note. and this Note shall not be deemed to have been fully paid or satisfied
until such fee shall have been paid.
7. DEFAULT AND ACCELERATION. If any Regular Payment under this Note is not
paid by the end of ten (10) calendar days after it is due, or if any
default exists under the Deed of Trust (Or other agreement securing this
Note), the Loan Agreement or any other Loan Document. then the entire
principal amount outstanding hereunder and all accrued interest thereon
shall, without notice or demand. at once become
<PAGE>
due and payable at the sole option of Bank. Upon the occurrence of any such
default, Bank may exercise any right or remedy under this Note, any other
Loan Document or applicable law, regardless of any prior forbearance.
8. MISCELLANEOUS
(a) Joint and Several Liability. If more than one person or entity is signing
this Note as Borrower, their obligations under this Note will be joint and
several. As to any Borrower that is a partnership, the obligations of Borrower
under this Note are the joint and several obligations of each general partner
thereof. Any married person signing this Note agrees that recourse may be had
against community property assets and against his or her separate property for
the satisfaction of all obligations contained herein and in each other Loan
Document. With respect to any person executing this Note as a trustee of a
revocable trust, the liability of said person shall not be limited to said
person's interest in such trust or any trust property, and Bank shall have full
and immediate recourse to any and all property of said person in his or her
individual capacity for any and all obligations of said person in his or her
trust capacity.
(b) Loan Agreement. This Note is subject to the terms and conditions of the
Loan Agreement, which, among other things, contains provisions for acceleration
of the maturity of this Note.
(c) Governing Law. This Note is governed by the laws of the State of
California. Borrower and each other person or entity jointly liable under this
Note hereby consent to the jurisdiction of any competent court within the State
of California and further consent to service of process by any means authorized
by California law.
(d) Waivers. Borrower hereby waives presentment; demand; notice of dishonor;
notice of default or delinquency; notice of acceleration; notice of nonpayment;
notice of costs, expenses or losses and interest thereon; and notice of interest
on interest and late charges.
(e) Delay in Enforcement. If Bank delays in exercising or fails to exercise
any of its rights under this Note or any other Loan Document, that delay or
failure shall not constitute a waiver of any of Bank's rights, or of any breach,
default or failure of condition of or under this Note or any other Loan
Document. No waiver by Bank of any of its rights, or of any such breach, default
or failure of condition, shall be effective unless the waiver is expressly
stated in a writing signed by Bank. Borrower hereby waives the right to assert
the defense of any statute of limitations to any debt or obligation evidenced by
this Note or any other Loan Document.
(f) Assignment. This Note inures to and binds the heirs, legal
representatives, successors and assigns of borrower and Bank; provided, however,
that Borrower may not assign this Note or any right to funds advanced or to be
advanced hereunder, or assign or delegate any of its rights or obligations,
without the prior written consent of Bank in each instance and in the sole
discretion of Bank. Bank may transfer this Note and all other Loan Documents,
and may sell or assign participation's or other interests in all or part of the
Loan, on the terms and subject to the conditions of the Loan Documents, all
without notice to or the consent of Borrower. In connection with any such sale,
assignment or participation, Bank may disclose to any prospective or actual
transferee all information from time to time provided by or on behalf of
Borrower in respect of the Loan, any collateral security therefor and any person
or entity obligated hereunder. All references in this Note to Bank shall mean
and include any subsequent holder hereof.
(g) Recovery of Bank's Costs. If any amounts owing under this Note are not paid
when due, Borrower shall pay all costs and expenses, including reasonable
attorneys' fees, incurred by Bank in the collection or enforcement of this Note.
(h) Cumulative Remedies. All of Bank's remedies in connection with this Note or
under applicable law shall be cumulative, and Bank's exercise of any one or
more of those remedies shall not constitute an election of remedies.
IN WITNESS WHEREOF, Borrower has duly executed and delivered this Note to Bank
as of the date first above written.
<PAGE>
BORROWER:
RESEARCH ENGINEERS. INC.,
A Delaware Corporation
By: /S/ BRIAN PAUL
- ------------------
Title: Secretary
- ------------------
<PAGE>
EXHIBIT 10.32
LINE OF CREDIT
FOR VALUE RECEIVED, on AUGUST 31, 1997 the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA. N.A. ("Bank"), as indicated below,
the sum of FIVE HUNDRED THOUSAND AND NO/100 Dollars ($500.000.00) or so much
thereof as is disbursed, together with interest on the balance of such principal
sum from time to time outstanding, at a per annum rate equal to the Reference
Rate,), such per annum rate to change as and when the Reference Rate shall
change.
As used herein, the term "Reference Rate" shall mean the rate announced by Bank
from time to time at its corporate headquarters as its "Reference Rate. The
Reference Rate is an index rate determined by Bank from time to time as a means
of pricing certain extensions of credit and is neither directly tied to any
external rate of interest or index nor necessarily the lowest rate of interest
charged by Bank at any given time. All computations of interest under this note
shall be made on the basis of a year of 360 days, for actual days elapsed.
1. INTEREST PAYMENTS. Debtor shall pay interest Monthly. Should interest not be
so paid, it shall become a part of the principal and thereafter bear interest as
herein provided.
At any time prior to the maturity of this note, the maker(s) may borrow, repay
and reborrow hereon so long as the total outstanding at any one time does not
exceed the principal amount of this note.
Debtor shall pay all amounts due under this note in lawful money of the United
States at Bank's ORANGE COUNTY CBO Office, or such other office as may be
designated by Bank, from time to time.
2. LATE PAYMENTS. If any installment payment required by the terms of this
note shall remain unpaid ten days after due, at the option of Bank, Debtor
shall pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, shall be payable on the outstanding
principal under this note at a per annum rate equal to five percent (5%) in
excess of the interest rate specified in the initial paragraph of this note,
calculated from the date of default until all amounts payable under this note
are paid in full.
4. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following (a) the failure of Debtor to include, make
any payment required under this note when due; (b) any breach, misrepresentation
or other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor")under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of voluntary or involuntary proceeding under any laws relating to bankruptcy,
insolvency, reorganization, arrangement, debt adjustment or debtor relief; (e)
the assignment by any Obligor for the benefit of such Obligor's creditors: (f)
the appointment, or commencement of any proceedings for the appointment, of a
receiver, trustee, custodian or similar official for all or substantially all of
any Obligor's property; (g) the commencement of any proceeding for the
dissolution or liquidation of any Obligor; (h) the termination of existence or
death of any Obligor; (i) the revocation of any guaranty or subordination
agreement given in connection with this note (j) the failure of any Obligor to
comply with any order, judgment, injunction, decree, writ or demand of any court
or other public authority; (k) the filing or recording against any Obligor, or
the property of any Obligor, of any notice of levy, notice to withhold, or other
legal process for taxes other than property taxes; (l) the default by any
Obligor personally liable for amounts owed hereunder on any obligation
concerning the borrowing of money; (m) the issuance against any Obligor, or the
property of any Obligor, of any writ of attachment, execution, or other judicial
lien; or (n) the deterioration of the financial condition of any Obligor which
results in Bank deeming itself, in good faith, insecure. Upon the occurrence of
any such default, Bank, in its discretion. may cease to advance funds hereunder
and may declare all obligations under this note immediately due and payable;
however, upon the occurrence of an event of default under d, e, f, or g, all
principal and interest shall automatically become immediately due and payable.
<PAGE>
5. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any endorser of this note,
including their successor and assigns, hereby consents to the jurisdiction of
any competent court within the State of California, except as provided in any
alternative dispute resolution agreement executed between Debtor and Bank, and
consents to service of process by any means authorized by California law. The
term "Bank" includes, without limitation, any holder of this note. This note
shall be construed in accordance with and governed by the laws of the State of
California. This note hereby incorporates any alternative dispute resolution
agreement, previously, concurrently or hereafter executed between Debtor and
Bank.
RESEARCH ENGINEERS, INC.
By: /S/ Brian Paul
- --------------------
Title: CFO
- -----------
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Research Engineers, Inc.
We consent to incorporation by reference in the registration statement (No.
333-29747) on Form S-8 of Research Engineers, Inc. of our report dated May 29,
1997, relating to the consolidated balance sheet of Research Engineers, Inc. and
subsidiaries as of March 31, 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
two-year period ended March 31, 1997, which report appears in the March 31, 1997
annual report on Form 10-KSB of Research Engineers, Inc.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
June 30, 1997
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,579
<SECURITIES> 1,701
<RECEIVABLES> 2,138
<ALLOWANCES> 40
<INVENTORY> 0
<CURRENT-ASSETS> 531
<PP&E> 4,022
<DEPRECIATION> 1,299
<TOTAL-ASSETS> 11,679
<CURRENT-LIABILITIES> 2,185
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 7,419
<TOTAL-LIABILITY-AND-EQUITY> 11,679
<SALES> 11,023
<TOTAL-REVENUES> 11,023
<CGS> 800
<TOTAL-COSTS> 9,758
<OTHER-EXPENSES> (62)
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<INCOME-PRETAX> 570
<INCOME-TAX> 348
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